-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VQFIKh+RyYgV+DEma89A+UNL4+E2Qn/MIfEcOF5WbDgbLg3wT6oCtIuLH+a+wKAn vWmUsTEVW6OMOFyxhGF7Dg== 0000950152-96-001110.txt : 19960325 0000950152-96-001110.hdr.sgml : 19960325 ACCESSION NUMBER: 0000950152-96-001110 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHARTER ONE FINANCIAL INC CENTRAL INDEX KEY: 0000819692 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341567092 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16311 FILM NUMBER: 96537512 BUSINESS ADDRESS: STREET 1: 1215 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: 2165665300 MAIL ADDRESS: STREET 1: 1215 SUPERIOR AVENUE STREET 2: 1215 SUPERIOR AVENUE CITY: CLEVELAND STATE: OH ZIP: 44114 10-K405 1 CHARTER ONE BANK 1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [ 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, 1995, 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 0-16311 CHARTER ONE FINANCIAL, INC. --------------------------- (exact name of registrant as specified in its charter) DELAWARE 34-1567092 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1215 SUPERIOR AVENUE, CLEVELAND, OHIO 44114 - ------------------------------------- ----- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (216) 566-5300 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 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. Yes X No --- --- The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 8, 1996 was $1,340,500,000. For this purpose, the following holders are considered affiliates: directors and executive officers of Charter One Financial, Inc. and individuals owning more than 5% of the voting stock. The number of shares outstanding of the registrant's sole class of common stock as of March 8, 1996 was 45,119,014. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for the April 17, 1996 Annual Meeting of Shareholders are incorporated by reference in Part III. ============================================================================== 2 TABLE OF CONTENTS
Item Number Page ------ ---- PART I 1. Business General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Market Area and Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Lending Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Investment Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Federal and State Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4. Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 18 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters . . . . . . . . . . . . . 19 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 21 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . . 81 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . 81 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 81 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . 81 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . 81 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
i 3 PART I CHARTER ONE FINANCIAL, INC. ITEM 1. BUSINESS GENERAL Charter One Financial, Inc. ("Charter One" or "the Company") is a Delaware corporation organized in 1987 for the purpose of becoming a holding company and owning all of the outstanding common stock of Charter One Bank, F.S.B. ("Charter One Bank" or "the Bank") in connection with Charter One Bank's 1988 conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank. Charter One is a unitary savings institution holding company which, under existing laws, has very few restrictions on permissable types of business activities. Charter One's business has consisted primarily of the business of Charter One Bank and its subsidiaries. The executive offices of Charter One are located at 1215 Superior Avenue, Cleveland, Ohio 44114, and the telephone number is (216) 566-5300. Charter One Bank, chartered in 1934 as The First Federal Savings and Loan Association of Cleveland, was the first federally chartered savings and loan association in Ohio. In 1982, Charter One Bank converted to a federally chartered savings bank, changing its name to The First Federal Savings Bank and, in 1992, changed its name once again, to Charter One Bank, F.S.B. On October 31, 1995, Charter One completed the most significant merger in its history when it combined with FirstFed Michigan Corporation ("FirstFed") in a merger of equals (the "Merger"). The Merger was accounted for as a pooling of interests and, accordingly, the financial statements for the Company for all periods prior to the Merger have been restated to include the results of FirstFed. Also on the Merger Date, FirstFed's principal subsidiary, First Federal of Michigan ("First Federal"), a savings and loan association, was merged with and into Charter One Bank. See Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and Note 2 of the "Notes to the Consolidated Financial Statements" for a discussion of the impact of recent business combinations and asset acquisitions. Headquartered in Cleveland, Ohio, Charter One Bank now operates through 155 banking offices: 94 in Ohio and 61 in Michigan. Offices in Ohio serve the Cleveland, Toledo, Youngstown, Portsmouth, Akron and Canton metropolitan areas. The Michigan franchise continues to operate under the First Federal of Michigan name and its markets include all of southeast Michigan, Lansing, Owosso and Kalamazoo. In addition to the banking offices, Charter One has nine loan production offices in Columbus, Dayton, Brimfield, Medina and Findlay, Ohio; Grand Rapids and Clarkston, Michigan; Indianapolis, Indiana; and Ashland, Kentucky. The business of Charter One Bank consists primarily of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to make residential mortgage, multifamily, commercial real estate, consumer and business loans. Charter One Bank has traditionally focused its lending activities on origination, for its portfolio, of loans secured by conventional first mortgages on owner-occupied one-to-four family residences located in its primary market areas. Residential mortgage lending remains Charter One Bank's most significant lending activity. Charter One Bank also originates first mortgage loans on multifamily and commercial real estate located primarily in its local market areas, as well as construction, consumer and business loans. Through subsidiaries, Charter One Bank engages in real estate appraisal, sales of tax-deferred annuities, mutual funds, and property and casualty insurance and the development, operation and sale of real estate. Additionally, in 1995, the Bank acquired companies, now owned as subsidiaries, which engage in leasing of capital equipment and providing data processing services. None of the subsidiary activities is considered to constitute a business segment. Charter One Bank is a member of the Federal Home Loan Bank System ("FHLBS") and the Federal Home Loan Bank of Cincinnati, and its deposits are insured up to prescribed limits by the Federal Deposit Insurance Corporation ("FDIC"). Charter One Bank is subject to comprehensive examination, supervision and regulation by its primary regulator, the Office of Thrift Supervision ("OTS"), and the FDIC. MARKET AREA AND COMPETITION As of December 31, 1995, Charter One Bank is ranked among the 10 largest thrift institutions in the country and operates 155 banking offices including 94 banking offices within 13 counties in Ohio and 61 within 8 counties in Michigan. The Bank's Ohio 1 4 franchise includes 46 offices in the Cleveland metropolitan area, 19 offices serving Toledo, 14 offices serving Canton, and 10 offices serving Akron. Additional markets include Portsmouth, Ohio (two offices) and Youngstown (three offices). The Michigan franchise is concentrated in southeastern Michigan with 53 offices and includes four offices in Lansing and Owosso located in the middle of the state. An additional four offices in Kalamazoo in the southwest portion of Michigan round out the franchise. The market areas now served by the Bank include approximately 46% of the population of Michigan and 40% of Ohio. Demographics vary according to the markets served and are considered diverse. The offices in northeastern Ohio and southeastern Michigan serve what may be characterized as heavily populated urban areas. In the southern portion of Ohio and mid-Michigan, the market is more rural and less densely populated. Generally speaking, the entire market is considered a relatively stable economic base for the Bank's operations. The Bank experiences substantial competition in attracting and retaining deposits as well as in satisfying lending objectives. Historically, the primary methodology employed by the Bank to attract deposits consists of attractive interest rates paid on consumer investments, federal deposit insurance coverage, many conveniently located offices and high quality service. Typically, the Bank's competition has been other savings banks and savings and loans, insurance companies, commercial banks, credit unions, the U.S. Treasury and other financial service providers. In the past several years, the primary competition has been mutual funds, the U.S. Treasury and investments in equities through investment brokers. Competition for deposits has also been very evident from insurance companies marketing tax-deferred annuity products. See "MD&A - Financial Condition - Deposits and Other Sources of Funds" for a discussion of the disparity in deposit insurance premium rates between commercial banks and thrifts. The Company believes that, as of June 30, 1995, the Bank's deposits represented an overall market share of 7.7% in Ohio and 4.4% in Michigan in those counties in which it operates. The primary factors in competing for loans are interest rates, loan origination fees and product offerings. Competition relating to the generation of loans is primarily identified as other savings banks, savings and loans, commercial banks, insurance companies and mortgage bankers. Although fixed-rate loan products represent a significant percentage of the Bank's originations, emphasis has been placed on the generation of adjustable-rate and shorter term loans in keeping with prudent management of interest rate risk factors. This has been a difficult undertaking as several major competitors have emphasized fixed-rate lending, creating a degree of resistance to marketing adjustable- rate loans. At December 31, 1995, the $12.1 billion portfolio of loans and mortgage-backed securities was composed of 41% with adjustable rates and 59% with fixed rates. This blend helps moderate the effect of interest rate fluctuations on net interest income and portfolio market value. 2 5 LENDING ACTIVITIES General. The composition of Charter One's loans and leases held for investment is summarized below.
COMPOSITION OF LOANS AND LEASES At December 31, ---------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 -------------- --------------- --------------- --------------- --------------- % of % of % of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (dollars in thousands) Real estate mortgage loans: Permanent: One-to-four family ........ $ 5,140,857 77.0% $ 5,266,481 80.0% $ 5,273,924 80.7% $ 4,880,120 79.0% $ 4,649,976 76.8% Multifamily...... 359,056 5.4 394,676 6.0 430,870 6.6 440,981 7.1 475,304 7.9 Commercial real estate.... 368,372 5.5 351,892 5.3 392,280 6.0 428,684 7.0 449,665 7.4 --------- ---- --------- ---- --------- ---- ---------- ---- --------- ---- Total permanent.... 5,868,285 87.9 6,013,049 91.3 6,097,074 93.3 5,749,790 93.1 5,574,945 92.1 Construction: One-to-four family 132,776 2.0 133,081 2.0 116,325 1.8 106,140 1.7 102,393 1.7 Multifamily .... 11,495 0.1 7,645 0.1 3,281 0.1 4,775 0.1 5,720 0.1 Commercial real estate.... 38,592 0.6 32,863 0.5 31,706 0.4 27,061 0.4 36,023 0.6 --------- ---- --------- ---- --------- ---- ---------- ---- --------- ---- Total Construction 182,863 2.7 173,589 2.6 151,312 2.3 137,976 2.2 144,136 2.4 --------- ---- --------- ---- --------- ---- ---------- ---- --------- ---- Total mortgage loans ..... 6,051,148 90.6 6,186,638 93.9 6,248,386 95.6 5,887,770 95.3 5,719,081 94.5 Consumer loans .... 594,609 8.9 483,531 7.3 392,001 6.0 414,035 6.7 441,642 7.3 Lease financings ... 131,352 2.0 - - - - - - - - Business loans ..... 65,747 1.0 84,307 1.3 70,125 1.1 64,779 1.0 66,966 1.1 --------- ---- --------- ---- --------- ---- ---------- ---- --------- ---- Total loans and leases..... 6,842,856 102.5 6,754,476 102.5 6,710,512 102.7 6,366,580 103.0 6,227,689 102.9 Less net items ..... 168,596 2.5 166,923 2.5 171,259 2.7 187,031 3.0 176,203 2.9 --------- ---- --------- ---- --------- ---- ---------- ---- --------- ---- Loans and leases, net ..... $6,674,260 100.0% $ 6,587,553 100.0% $6,539,253 100.0% $6,179,550 100.0% $6,051,486 100.0% ========== ===== ========== ===== ========== ===== ========== ===== ========== ==== As of December 31, 1995, there was no concentration of loans or leases in any type of industry which exceeded 10% of the Bank's total loans and leases that is not included as a loan or lease category in the table above.
Charter One Bank has traditionally focused its lending activities on the origination, for its portfolio, of loans secured by conventional first mortgages on owner-occupied one-to-four family residences located in its market areas in Ohio. As a result of the Merger, the Bank's market area now includes Michigan. Residential mortgage lending remains the Bank's most significant lending activity. For many years, the Bank has also originated first mortgage loans on multifamily and commercial real estate located primarily in its local market areas, as well as construction, consumer and busines loans. It is not anticipated that Charter One Bank will alter its principal lending focus during the next three years of operations, which will remain to continue to grow market share through more efficient and deliberate delivery techniques together with improved service. 3 6 The following table reflects the principal repayments contractually due (assuming no prepayments) on the Bank's loans held for investment and mortgage-backed securities held to maturity portfolio at December 31, 1995. Management expects prepayments will cause actual maturities to be shorter.
CONTRACTUAL MATURITIES Principal Repayments Contractually due in the Year(s) Ended December 31, -------------------------------------------------------------------------------- 1999- 2001- 2006- 2011 and 1996 1997 1998 2000 2005 2010 Thereafter Total ---- ---- ---- ------ ------ ------ ---------- ----- (in thousands) Real estate mortgage loans: Permanent . . . . $296,199 371,470 368,488 579,537 1,452,658 976,335 1,741,501 5,786,188 Construction loans . . . . . 34,318 20,767 6,621 1,899 6,350 6,511 30,082 106,548 Mortgage-backed securities held to maturity . . . . 149,200 160,576 174,515 390,317 1,043,969 557,455 1,403,128 3,879,160 Consumer loans . . 70,608 49,151 47,993 93,827 293,619 28,285 6,763 590,246 Business loans . . 47,548 870 871 6,547 484 2,169 2,169 60,658 --------- ------- ------- ------- --------- ------- --------- --------- Loans held for investment and mortgage-backed securities held to maturity, net(a) $ 597,873 602,834 598,488 1,072,127 2,797,080 1,570,755 3,183,643 10,422,800 ========= ======= ======= ========= ========= ========= ========= ========== - ------------------- (a) Of the $9.8 billion of loans and mortgage-backed securities due after December 31, 1996, 63.2% have fixed interest rates and 36.8% have adjustable interest rates.
The table below stratifies the Bank's mortgage-backed security and loan and lease portfolios by adjustable-rate and fixed-rate balances. All amounts are shown prior to any allowance for loan losses, unamortized premiums and discounts, deferred points and fees and loans in process.
At December 31, -------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (dollars in thousands) Adjustable-rate loans(1): Mortgage loans and mortgage- backed securities . . . . . $ 4,692,067 4,906,110 3,576,751 3,667,895 4,490,433 Consumer loans . . . . . . . 258,286 241,185 237,309 256,373 248,659 Business loans . . . . . . . 51,025 69,629 57,543 62,355 65,271 ----------- --------- --------- --------- --------- Total adjustable-rate loans . . . . . . . . . $ 5,001,378 5,216,924 3,871,603 3,986,623 4,804,363 =========== ======== ========= ========= ========= Fixed-rate loans: . . . . . . . Mortgage loans and mortgage- backed securities . . . . . $ 6,661,155 7,958,664 9,350,018 8,194,477 6,642,773 Consumer loans . . . . . . . 336,323 242,346 154,692 157,662 192,906 Business loans . . . . . . . 14,722 14,678 12,582 2,424 1,695 Lease financings . . . . . . 131,352 - - - - ----------- --------- --------- --------- --------- Total fixed-rate loans $ 7,143,552 8,215,688 9,517,292 8,354,563 6,837,374 =========== ========= ========= ========= ========= Adjustable-rate loans, leases and mortgage-backed securities as a percentage of total loans, leases and mortgage-backed securities . . . . . . . . . 41.18% 38.84% 28.92% 32.30% 41.27% - --------------- (1) Substantially, all loans, leases and mortgage-backed securities in the adjustable-rate loan portfolio have contractual interest rates that increase or decrease at periodic intervals no greater than three years, or have original terms to maturity of three years or less.
4 7 Residential Mortgage Lending. Under applicable federal regulations, Charter One Bank may originate or purchase whole residential mortgage loans secured by properties located anywhere in the United States. The Bank has, however, traditionally focused its lending activities on the origination of first mortgage loans on residential property in its market areas and, at December 31, 1995, over 94% of the Bank's one-to-four family residential loan portfolio was secured by properties located in its primary market areas. The Bank offers fixed-rate and adjustable-rate ("ARM") mortgage loans with terms ranging from 10 to 30 years, including traditional single-family home mortgage loans with terms of either 15 or 30 years. The Bank's fixed-rate residential mortgage loans have terms of 10, 15 and 30 years and require level monthly payments sufficient to fully amortize principal over the life of the loan. The Bank originates residential mortgage loans with loan-to-value ratios up to 97%. On any mortgage loan exceeding an 85% loan-to-value ratio, the Bank requires private mortgage insurance which protects the Bank against losses of at least 25% of the mortgage loan amount. All property securing real estate loans made by the Bank is appraised either by appraisers regularly employed by the Bank or by independent appraisers selected by the Bank and subject to review by Bank-employed appraisers. Generally, Charter One Bank's ARMs have contractual maturities of 30 years and amortize on a monthly basis. The interest rates on the majority of ARMs originated by the Bank are subject to semi-annual adjustment, but the Bank also originates ARMs that adjust annually or every three years, and has in the past originated ARMs that adjust at five-year intervals. At December 31, 1995, the total balance of three-year ARMs was $130.7 million, and the total balance of five-year ARMs was $147.5 million. The Bank often originates ARMs at a competitive initial rate below the rate that would prevail if the index used for repricing was to be applied at origination. However, the Bank generally applies underwriting criteria that limit the amount of the loan to an amount for which the borrower could qualify at the indexed rate. The Bank has originated ARMs tied to various indices, including six-month Treasury bill and longer term Treasury security rates published by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Bank's ARM products feature a stated margin, which from time to time may vary, depending on competitive conditions, over a specified published index, with maximum decreases or increases in the interest rate during the year of 2.00%. In addition, borrowers are entitled to refinance these loans at any time within the first three years, upon the payment of specified fees, to any fixed-rate loan plan available at the Bank at interest rates in effect at that time. As part of its residential lending program, the Bank offers construction loans with 80% loan-to-value ratios to qualified builders. Construction loans generally have terms of up to 18 months and interest rates which generally adjust in accordance with the Bank's specified index. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. In addition to builders' projects, the Bank finances the construction of individual owner-occupied houses up to 90% loan-to-value where qualified contractors are involved. Construction loans are structured either to be converted to permanent loans at the end of the construction phase or to be paid off upon receiving financing from another financial institution. The Bank's residential mortgage loans customarily include "due-on-sale" clauses, which are provisions giving the Bank the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage. The Bank enforces due-on-sale clauses through foreclosures and other legal proceedings to the extent permitted under applicable laws. Loans insured by the Federal Housing Administration ("FHA") or partially guaranteed by the Veterans Administration ("VA") do not contain due-on-sale clauses. At December 31, 1995, FHA and VA loans represented 1.0% of the Bank's total loan portfolio (excluding mortgage-backed securities). Residential mortgage loan originations are derived from a number of sources, including commission loan representatives, wholesale account representatives, real estate broker referrals, present borrowers and savers, builders and walk-in customers. The Bank also advertises its residential mortgages extensively in local newspapers. Loan applications are accepted by designated loan representatives and are underwritten by a separate staff of underwriters employed at each of the Bank's divisional headquarters. Residential mortgage loans exceeding $500,000 must be approved by two members of the Board of Directors who are also members of the loan committee or one member of the Board of Directors and the Executive Vice President of Mortgage Lending. Commercial Real Estate and Multifamily Lending. The Bank originates loans secured by multifamily and commercial real estate properties. At December 31, 1995, the Bank's permanent and construction multifamily and commercial real estate loan portfolios totaled $777.5 million, representing 11.6% of the total loan and lease portfolio 5 8 (excluding mortgage-backed securities). Generally, permanent loans are made to finance the acquisition of seasoned income-producing properties located in the Bank's market areas or as the permanent financing following completion of construction on such properties. Permanent loans have a maximum amortization of 30 years, and typically have terms ranging from five to ten years. Rates on permanent loans adjust at specified intervals (typically 90-day, one-year, three-year or five-year intervals) to specified spreads over related U.S. Treasury security indices. The Bank has also granted loans where the borrower may elect to change the index and the adjustability of the loan. Such an option enables the borrower to switch from a six-month adjustment schedule to a one, three or five-year adjustment schedule. Commercial real estate loans are generally written in amounts of 80% or less of the appraised value of the property. Property securing commercial real estate loans is required to be appraised by the Bank's appraisal subsidiary or by an outside appraiser whose work is reviewed by the Bank's appraisal subsidiary. In addition, the Bank's underwriting procedures require verification of the borrower's credit history, income and financial statements, banking relationships, references and income projections for the property. The Bank generally requires that the property produce net income (i.e., income after all operating expenses but before mortgage payments) in excess of 115% of the debt service requirement. The Bank makes non-recourse and partial recourse loans when, in the opinion of management, the value of the property securing the loan justifies it. Generally, the Bank limits its multifamily and commercial real estate loans to one borrower to amounts not exceeding $20 million, although its legal limit at December 31, 1995 was $131 million. The Bank also provides construction financing and land acquisition and development loans. At December 31, 1995, the total amount of commercial real estate construction loans and multifamily construction loans amounted to $50.1 million, of which $38.4 million was outstanding. Land acquisition and development loans amounted to $8.0 million, of which $5.3 million was outstanding at December 31, 1995. These loans may involve additional risks attributable to the fact that funds are advanced upon the security of the project under construction or development, which is of uncertain value prior to the completion of construction or development and because it is relatively difficult to evaluate accurately the total funds required to complete construction or development or the time and interest carry required to lease constructed property or sell developed property. At December 31, 1995, commercial and multifamily construction loans represented .7% of the portfolio. Acquisition and development loans represented .1% of the portfolio at December 31, 1995. The Bank's largest outstanding construction loan at December 31, 1995 totaled $4.4 million. The largest outstanding acquisition and development loan at December 31, 1995 totaled $1.2 million. The maximum term on construction and land acquisition and development loans is 36 months, but is more typically 24 months. Rates charged on construction and land acquisition and development loans float over specified prime rates and adjust monthly. At December 31, 1995, the largest portion of the Bank's commercial real estate loan portfolio consisted of loans on strip shopping centers. Those loans comprise 34% of the commercial real estate loans. In addition to strip shopping centers, the Bank's commercial real estate loan portfolio is secured by office buildings, warehouses, land, hotels, mobile home parks and other properties. None of these groups represented more than 16% of the commercial real estate loan portfolio. See Note 5 of the "Notes to Consolidated Financial Statements" for further information concerning these loan balances. Commercial mortgage lending generally involves greater risk than residential mortgage lending. Such lending typically involves larger loan balances to single borrowers or groups of related borrowers than residential mortgage loans. Furthermore, the repayment of loans secured by income-producing properties is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the Bank's loans may be impaired. These risks can be affected significantly by supply and demand in the market for the type of property securing the loan and by general economic conditions, and commercial mortgage loans may thus be subject, to a greater extent than residential property loans, to adverse conditions in the economy. At December 31, 1995, $3.9 million, or .50%, of the Bank's multifamily and commercial real estate loans were 61 days or more delinquent. Consumer Lending. Under applicable Federal law, the Bank is authorized to invest up to 30% of its assets in consumer loans. Charter One Bank currently originates a variety of consumer loans including lines of credit secured by owner-occupied real estate, automobile loans, marine loans, unsecured loans and real estate equity loans. The Bank's consumer loan portfolio, excluding unearned discounts, totaled approximately $594.6 million at December 31, 1995 representing 8.9% of its total loan and lease portfolio (excluding mortgage-backed securities). The Bank's principal consumer loan product is a home equity line of credit. At December 31, 1995, the Bank had authorized lines of $584.2 million, $229.6 million of which was outstanding under this program, representing 38.6% of the consumer loan 6 9 portfolio. The Bank's closed-end consumer loans totaled $365.0 million, or 61.4%, of consumer loans at December 31, 1995. These closed-end loans included term loans secured by first or second mortgages on one-to-four family residential properties ($230.0 million), marine loans ($45.0 million), and mobile home loans ($76.0 million). In underwriting consumer loans, the Bank places primary emphasis on the applicant's credit history, stable income and net worth. Loans secured by second mortgages, together with loans secured by all prior liens, are usually limited to 90% or less of the appraised value of the property securing the loan or 80% in the case of non-amortizing home equity lines of credit. At December 31, 1995, .04% of the Bank's consumer loan portfolio was 61 days or more delinquent. Lease Financing. The Bank is engaged in equipment leasing through a subsidiary, ICX Corporation ("ICX"). The equipment leased by ICX is for commercial and industrial use only. The leasing business is targeted to upper middle-market and larger companies ("Lessee"), specifically those with revenues in excess of $100 million annually. Equipment leasing offers an alternative type of financing to corporations for capital equipment acquisitions. The terms of the leases range from two to ten years and are almost always at fixed rates, and are noncancellable contractual obligations of the Lessee. A Lessee is evaluated from a credit perspective in the same fashion as a borrower. It is expected to be able to make the rental payments based on its business' cash flow and the strength of its balance sheet. Leases are usually not evaluated as collateral based transactions and, therefore, the Lessee's overall financial strength is the most important credit evaluation factor. A review of the leases is performed by the Bank's Business Loan Committee and Board of Directors in accordance with its lending policies. ICX transactions range in size from $25,000 to $10 million. On December 31, 1995, ICX had an exposure exceeding $10 million to two Lessees. On December 31, 1995, ICX's lease portfolio amounted to $131.4 million or 2.0% of the total loan and lease portfolio. On December 31, 1995, .17% of ICX's leases were 30 days or more delinquent and there were no leases that were not accruing interest. See Note 5 to the Consolidated Financial Statements for further information concerning leases. Business Lending. The Bank is permitted to invest up to 10% of its assets in secured and unsecured loans for commercial, corporate, business and agricultural purposes. The Bank's business lending services are directed toward smaller "middle market" companies, i.e., those with $1.0 million to $20.0 million in sales, located in its market areas. Under its corporate banking program, the Bank offers traditional lines of credit, revolving credits, term loans, single purpose loans, commercial letters of credit and acceptances, and performance letters of credit. The Bank also offers Small Business Administration guaranteed loans at slightly higher rates. Most business loans are written with a provision for a daily rate adjustment. The prevailing index for rate adjustments is the Bank's prime rate, which is adjusted to reflect changes in local or national money market conditions. The majority of loans within the portfolio carry a rate increment over the prime rate based upon factors such as the term of the loan, credit risk, and the account relationship of the borrower. A few loans have fixed interest rates determined at the time of takedown. Terms of such loans are five years or less. Business loans are made on the basis of the borrower's ability to repay from the cash flow of the business and are generally secured by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of business loans may be substantially dependent on the success of the business itself. Collateral securing the loans may depreciate over time, cannot be appraised with as much precision as residential real estate, and may fluctuate in value based on the success of the business. At December 31, 1995, 97.6% of total business loans were secured by some form of collateral. The Bank's business loan commitments range in size from $10,000 to $10.5 million. At December 31, 1995, commitments of $1.0 million or more had been made to 23 borrowers, including 3 commitments in excess of $5 million. Business loans over $1 million require approval of a majority of the Bank's Business Loan Committee, which is comprised of members of the Board of Directors and management. The largest commitment totals $10.5 million, of which $9.2 million was outstanding at December 31, 1995. The borrower wholesales building materials; manufactures architectural and structural precast concrete products; processes mined products; and wholesales trucks, parts and accessories, and is performing as agreed. The second largest commitment totals $8.4 million, of which $4.9 million was outstanding at December 31, 1995. The borrower wholesales 7 10 automotive-related products and is performing as agreed. The third largest commitment totals $6.7 million, of which $5.0 million was outstanding at December 31, 1995. The borrower wholesales steel products and is performing as agreed. As of December 31, 1995, the Bank's business loan portfolio amounted to $65.7 million, or 1.0%, of its total loan portfolio (excluding mortgage-backed securities), while its unfunded commitments totaled $27.2 million. At such date, the Bank had a total of 412 loans to 240 borrowers outstanding. Business loans are generally considered to involve a higher degree of risk than residential real estate loans. At December 31, 1995, .6% of the Bank's business loans were 30 days or more delinquent and there were no business loans that were not accruing interest. Purchase, Sale and Servicing of Mortgage Loans and Mortgage-Backed Securities. From time to time, the Bank has purchased whole loans and mortgage-backed securities in accordance with ongoing asset and liability management objectives. In addition, from 1991 to 1993, the Bank acquired $1.1 billion in loans when it purchased Women's Federal, Civic Savings and First Federal of Toledo. The Bank underwrites the loans it purchases on the basis of its own underwriting standards. The Bank currently purchases loans only from federally insured depository institutions or nationally recognized mortgage bankers or on a service-released basis. At December 31, 1995, loans serviced by others totaled $396.1 million, representing 5.8% of the Bank's loan portfolio. Charter One Bank originates loans primarily for retention in its portfolio. From time to time, the Bank will use the secondary mortgage market to reduce the Bank's risk that the interest rates it pays depositors will escalate while the Bank is holding long-term, fixed-rate loans in its portfolio. This also allows the Bank to continue to make loans during periods when saving flows decline or funds are not otherwise available for lending purposes. In connection with such sales, the Bank generally retains the servicing of the loans (i.e., collection of principal and interest payments), for which it generally receives a fee payable monthly of .25% to .50% per annum of the unpaid balance of each loan. The Bank has also engaged in the sale of seasoned fixed-rate mortgage loans and mortgage-backed certificates in order to attempt to reduce its exposure to interest-rate risk by investing the proceeds in assets with higher rates and shorter terms. At December 31, 1995, the Bank serviced for others approximately $1.2 billion of mortgage loans. The Bank has not typically sold loans with servicing fees materially in excess of normal servicing fee rates, which would require an adjustment to the selling price pursuant to SFAS No. 65. The following table sets forth information as to the Bank's loan and lease servicing portfolio, net of loans in process, at the dates shown.
1995 1994 1993 1992 1991 ---------------- ---------------- ---------------- ----------------- --------------- Amount % Amount % Amount % Amount % Amount % -------- --- -------- --- -------- --- -------- --- -------- --- (dollars in thousands) Loans and leases owned and serviced by the Bank $ 6,431,056 84.5% $ 6,301,477 87.7% $ 6,009,254 86.2% $ 5,593,362 82.0% $ 5,423,237 74.0% Loans serviced for others......... 1,181,245 15.5 883,399 12.3 960,318 13.8 1,223,993 18.0 1,901,080 26.0 --------- ----- ------- ---- --------- ---- --------- ------ --------- ----- Total....... $ 7,612,301 100.0% $ 7,184,876 100.0% $ 6,969,572 100.0% $ 6,817,355 100.0% $ 7,324,317 100.0% ========= ===== ========= ===== ========= ====== ========= ===== ========== =====
Information concerning the Bank's servicing income from loans serviced for others is summarized in the following table for the periods indicated:
Year Ended December 31, ---------------------------------------------------------------- 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ (dollars in thousands) Loan servicing income during the period . . . . . . . . . . . . . . . $4,143 $4,735 $ 5,534 $ 6,589 $ 8,827 Loan servicing income as a percentage of net interest income . . . . . . . . . 1.30% 1.52% 1.80% 2.67% 4.22% Gross servicing spread during the period . . . . . . . . . . . . . . . 0.45% 0.47% 0.45% 0.40% 0.42%
8 11 Delinquencies and Nonperforming Assets. Delinquent and problem loans and leases are a normal part of any lending business. When a borrower fails to make a required payment when the payment is due, the loan or lease is considered delinquent and the Bank generally institutes internal collection procedures. Delinquent loans and leases are identified by the 15th day of delinquency, regardless of any grace period. The borrower is contacted by a representative of the Bank to determine the reason for the delinquency. In most cases, delinquencies are cured promptly. However, if a loan or lease has been delinquent for 60 to 90 days, the Bank reviews the loan or lease status and, where appropriate, appraises the condition of the property and the financial circumstances of the borrower. Based upon the results of any such investigation, the Bank may (i) accept a repayment program of the arrearage from the borrower; (ii) seek evidence, in the form of a listing contract, of efforts by the borrower to sell the property if the borrower has stated that it is attempting to sell; (iii) request a deed in lieu of foreclosure; or (iv) initiate foreclosure proceedings. A decision as to whether and when to initiate foreclosure proceedings is based on such factors as the amount of the outstanding loan in relation to the original indebtedness, the extent of delinquency, the borrower's ability and willingness to cooperate in curing delinquencies and, also, any environmental issue that may need to be addressed. Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired, it is recorded at the lower of cost or estimated fair value at the date of acquisition and any write-down resulting therefrom is charged to the allowance for losses. Interest accrual, if any, ceases on the date of acquisition and all costs incurred from that date in maintaining the property are expensed. However, costs relating to the development and improvement of the property are capitalized to the extent of fair value, less estimated costs to sell. Federal regulations require that each insured institution should independently review and classify assets. For those assets that have been reviewed and determined to have greater risk than normally acceptable, there are three classifications - Substandard, Doubtful and Loss. An asset classified Substandard is inadequately protected by the net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified suffer from a well-defined weakness or weaknesses. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. An asset classified Doubtful has the weaknesses of those classified Substandard with the added characteristic that the weakness or weaknesses make collection or liquidation in full highly questionable and improbable. An asset classified Loss is considered uncollectible and of such little value that its continuance as an asset is unwarranted. On the basis of management's review at December 31, 1995, the Bank had classified $60.9 million in assets as "Substandard", $1.8 million as "Doubtful" and $2.7 million as "Loss". Management periodically reviews its loan and lease portfolio and has, in the opinion of management, appropriately classified and established allowances against all assets requiring classification under the regulation. INVESTMENT ACTIVITIES Federally chartered savings institutions have authority to purchase various types of investments, including mortgage-backed securities, U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. As a member of the FHLB System, the Bank is required to maintain liquid assets at minimum levels which vary from time to time. Funds not used by the Bank for loan originations have been invested in instruments that enhance the Bank's liquidity and yield within acceptable credit risk parameters. The general objectives of the Bank's investment policy are to (i) furnish funds to meet the anticipated and unanticipated operating needs of the Bank, (ii) maximize income while protecting against credit risks, (iii) comply with legal liquidity requirements, and (iv) manage the repricing characteristics of the Bank's assets and liabilities. The Bank's investment activities are directly supervised by an investment committee under investment policy guidelines adopted by the Board of Directors. These guidelines generally limit investments to securities qualifying as liquid assets under applicable regulations. With the prior approval of the investment committee, the Bank may, however, purchase any security qualifying as a legal investment subject to Board-approved limits by type. The relative size and mix of investment securities and loans in the Bank's portfolio are based on management's judgment as to the attractiveness of yields available on loans and other investments of comparable maturities. The Bank emphasizes low credit risk as a major factor in selecting investment securities. 9 12 SOURCES OF FUNDS General. Deposits have historically been the most important source of the Bank's funds for use in lending and for general business purposes. The Bank also derives funds from FHLB advances, reverse repurchase agreements and other borrowings, principal repayments on loans and mortgage-backed securities, funds provided by operations and proceeds from the sale of loans and loan participations. At December 31, 1995, 56% of interest-bearing liabilities were in the form of deposits and 44% were in borrowings. Deposit inflows and outflows are significantly influenced by general interest rates, money market conditions and competitive factors. Borrowings are used to compensate for reductions in normal sources of funds, such as deposit inflows. They may also be used to support expanding loan originations. Deposits. The Bank reprices its deposits weekly, or more frequently if required, based primarily on competitive conditions. In order to decrease the volatility of its deposits, the Bank imposes stringent penalties on early withdrawal of its certificates of deposit. Consumer and commercial deposits are attracted principally from within the Bank's market areas through the offering of a broad selection of deposit instruments including passbook savings accounts, checking accounts, and money market accounts. The Bank also offers certificates of deposit with terms ranging from 30 days to 10 years. Interest rates on these certificates vary according to the terms selected and are based upon several indices including the rates paid on government securities with similar maturities. See "MD&A - Financial Condition - Deposits and Other Sources of Funds" for a discussion of the disparity in deposit insurance premium rates between commercial banks and thrifts. The following table indicates the amount of the Bank's certificates of deposit and other deposits of $100,000 or more by time remaining until maturity as of December 31, 1995.
Certificates Checking, Savings and Time to Maturity as of December 31, 1995 of Deposit Money Market Accounts ---------------------------------------- ----------- --------------------- (in thousands) Three months or less . . . . . . . . . . . . . . . . . . . . $ 247,061 $ 149,191 Three through six months . . . . . . . . . . . . . . . . . . 158,271 - Six through twelve months . . . . . . . . . . . . . . . . . . 148,067 - Over twelve months . . . . . . . . . . . . . . . . . . . . . 111,237 - --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 664,636 $ 149,191 ========= =========
The following table sets forth, by various interest rate categories, certain information concerning maturities of the Bank's certificates of deposit at December 31, 1995.
December 31, 1995 ------------------------------------------------------------------------ Maturing In Total ------------------------------------------------------------ ----------- 1996 1997 1998 Thereafter ---- ---- ----- ------------ (dollars in thousands) 4.00% or less . . . . . . . . . . $ 74,155 3,816 4,320 9,756 92,047 4.01 - 6.00% . . . . . . . . . . 2,161,232 355,183 157,287 99,906 2,773,608 6.01 - 8.00% . . . . . . . . . . 914,737 249,409 59,048 224,532 1,447,726 8.01 - 10.00% . . . . . . . . . . 9,112 4,119 6,488 59,949 79,668 10.01 - 12.00% . . . . . . . . . 17,876 6,968 1,686 5,128 31,658 12.01 - 14.00% . . . . . . . . . - 790 9 698 1,497 14.00% or more . . . . . . . . . - 2,236 2,148 8,243 12,627 ----------- ------- ------- ------- --------- Total certificates . . . . . . $ 3,177,112 622,521 230,986 408,212 4,438,831 =========== ======= ======= ======= ========= Percent of total . . . . . . . 71.6% 14.0% 5.2% 9.2% 100.0 % ===== ===== ===== ==== =====
Borrowings. The Bank borrows funds from the FHLB ("FHLB advances") on the security of its capital stock of the FHLB and a portion of its real estate loans and mortgage-backed securities. The Bank must meet certain standards related to creditworthiness and community support in connection with the borrowings. These borrowings are made 10 13 pursuant to several different credit programs with varying interest rates and maturities. Over the past few years, the Bank has increased its use of FHLB advances with variable rate, interest rate cap and call features. As a result of the Merger, the Bank is now using reverse repurchase agreements as part of its funding sources. These instruments have traditionally been short-term funding sources, but in recent years agreements have included extended terms as well as variable-rate, interest-rate cap and call features. Although replacement of its reverse repurchase agreements as they mature is not guaranteed, management believes established credit lines and collateral levels are sufficient to continue the availability of this source of funds. Further reference is made to Notes 10, 11 and 12 of the "Notes to Consolidated Financial Statements" for an analysis of FHLB advances, reverse repurchase agreements and other borrowings. See also Note 13 of the "Notes to Consolidated Financial Statements" for information regarding the interest rate risk management instruments used to extend the terms of liabilities and protect the cost of funds from increasing interest rates. The following table sets forth certain information regarding short-term borrowings at the end of and during the periods indicated. The Company's short-term borrowings consist entirely of reverse repurchase agreements.
Year Ended December 31, ------------------------------------------------------------ 1995 1994 1993 ---- ---- ---- (in thousands) Borrowings outstanding at end of period . . . . . . $ 848,033 2,321,433 2,576,873 Weighted average rate at end of period(a) . . . . . 5.86% 5.61% 3.45% Maximum month-end balance of borrowings during the period . . . . . . . . . . . . . . . . 2,662,000 2,526,000 2,658,000 Approximate average borrowings outstanding during the period(b) . . . . . . . . . . . . . . . 2,273,000 2,245,000 2,561,000 Approximate weighted average rate during the period(a) . . . . . . . . . . . . . . . . . . 5.99% 4.44% 3.53% - --------------- (a) Does not include the annualized effect of interest rate exchange, cap and collar positions. (b) Computed on a daily basis.
SUBSIDIARIES As a federally chartered savings bank, the Bank is permitted by federal regulations to invest up to 2% of its assets in the stock of, or loans to, service corporation subsidiaries which may engage exclusively in OTS-approved activities that are reasonably related to the Bank's business. The Bank may invest an additional 1% of its assets in service corporations where such additional funds are used for inner-city or community development purposes. The net book value of the Bank's investment in and loans to its service corporations at December 31, 1995 was $167.6 million, including a $10.0 million letter of credit guaranteeing an equal amount of industrial revenue development bonds, the proceeds of which were used for the construction of its headquarters building in 1986. Operations of the subsidiaries accounted for $20.9 million or 2.0% of 1995 consolidated total income. Service corporations are involved principally in equipment leasing; real estate appraisal; sales of tax-deferred annuities, mutual funds and property and casualty insurance; data processing services; and the development, operation and sale of real estate. During January 1995, the Bank completed the acquisition of a privately-held, Cleveland-based company specializing in leasing data processing, telephone and other capital equipment, as well as the acquisition of a computer service bureau which provides substantially all of the Bank's data processing services. Both of these companies are operated as subsidiaries of the Bank. 11 14 EMPLOYEES At December 31, 1995, Charter One and its subsidiaries employed 2,416 full-time equivalent employees, none of whom is represented by a collective bargaining group. Management considers its relations with its employees to be excellent. Charter One currently maintains a comprehensive employee benefit program providing, among other benefits, an ESOP plan, a 401(k) savings plan, hospitalization and major medical insurance, paid sick leave, long-term disability insurance and life insurance and educational programs. REGULATION General. Charter One is a savings and loan holding company and, as such, is subject to regulation by the OTS. Charter One Bank is a federally chartered savings bank and is a member of the FHLBS, while its deposits are insured by the FDIC through the Savings Association Insurance Fund ("SAIF"). The lending activities of Charter One Bank must comply with various state and federal regulatory requirements. The OTS periodically examines the Bank for compliance with various regulatory requirements. The FDIC also conducts examinations of SAIF members. The Bank must file reports with the OTS describing its activities and financial condition. This supervision and regulation is intended primarily for the protection of depositors. The following discussion provides an overview of regulations that have the most significant effect on Charter One. The laws and regulations governing savings institutions have been through at least two major revisions in recent years. First, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 effected a comprehensive reorganization of the thrift industry regulatory structure and insurance system. Then, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") legislated extensive changes to federal banking laws. Because of the comprehensive nature of the changes and extended phase-in periods, many of the provisions of FDICIA have yet to be implemented by the regulators. There can be no assurances as to the future effects of recently adopted changes. Capital Requirements. Regulatory capital standards for savings institutions consist of three components: a core capital requirement, a tangible capital requirement and a risk-based capital requirement. All three components are required to be no less stringent than the corresponding requirements applicable to national banks. All savings institutions must have core capital of at least 3.00% of adjusted total assets. Charter One Bank's core capital equals shareholders' equity adjusted for net unrealized gains and losses on securities available for sale less the capitalization of the parent company, its investment in a real estate subsidiary and goodwill. Charter One Bank's core capital ratio was 6.11% at December 31, 1995. Savings institutions have a statutory requirement to maintain tangible capital of at least 1.5% of adjusted total assets. For purposes of this requirement, Charter One Bank's tangible capital is equal to its core capital. At December 31, 1995, Charter One Bank's tangible capital ratio was 6.11%. The risk-based capital standard adopted by the OTS currently requires savings institutions to maintain a minimum ratio of total capital (core capital plus supplementary capital) to risk-weighted assets of 8.00%. At the end of 1995, Charter One Bank's supplementary capital consisted of general valuation allowances. Supplementary capital may be used to satisfy the risk-based requirement only up to an amount equal to core capital. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks which OTS deems inherent in the type of assets. Charter One Bank's risk-based capital ratio was 14.29% at December 31, 1995. The OTS has also added an interest rate risk component to the risk-based requirement. Each savings institution must measure the effect of an immediate 200 basis point change in interest rates on the value of its portfolio, as determined under the methodology established by the OTS. If the measured interest rate risk is above the level deemed normal under the regulation, the institution will be required to deduct one-half of that excess exposure from its total capital when determining its level of risk-based capital. The OTS is also required to adjust the risk-based capital requirement to take into account risks due to concentrations of credit and non-traditional activities. The OTS is proposing to impose individualized higher capital requirements on savings institutions which have a high degree of exposure to such risks on a case-by- case basis. In addition, the OTS has indicated that examiners may require institutions with large unrealized 12 15 losses on debt securities to hold additional capital if the regulators have a safety and soundness concern. The regulators have expressed no such concern as to the Bank as of December 31, 1995. See "MD&A - Capital and Dividends" and Note 16 of the "Notes to Consolidated Financial Statements" for a discussion of Charter One Bank's capital calculation and its compliance with various minimum regulatory capital requirements at December 31, 1995. FDICIA requires the federal banking regulators to take prompt corrective action if an institution fails to satisfy minimum capital requirements or is found to be in an unsafe or unsound condition. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the minimum levels for any of its capital requirements. The federal banking regulators measure a depository institution's capital adequacy on the basis of a savings institution's total risk-based capital ratio, Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and core capital, or leverage ratio. All institutions are classified as either well capitalized, adequately capitalized or significantly under capitalized. Institutions classified as either undercapitalized or significantly undercapitalized (based either on normal capital ratios or safety and soundness considerations) are subject to various restrictions on their operations and regulatory demands for recapitalization. At December 31, 1995, the Bank's Tier 1 risk-based ratio was 13.44% and, as previously discussed, its risk-based and core capital ratios were 14.29% and 6.11%, respectively. As a result, Charter One Bank was considered well capitalized for purposes of this regulation at the end of 1995. Charter One Bank is not, and does not expect to become, subject to corrective regulatory action. Capital Distributions Regulation. The OTS regulation on capital distributions imposes limits on all capital distributions by savings institutions. Since this regulation applies to Charter One Bank, it affects the Bank's ability to pay dividends to its parent, Charter One, which in turn pays dividends to its shareholders. The regulation establishes a three-tiered system of regulation, with the greatest flexibility being afforded to well-capitalized institutions. An institution that has regulatory capital which is at least equal to its fully phased-in capital requirement, and has not been notified that is "is in need of more than normal supervision," is a Tier 1 institution. Charter One Bank was a Tier 1 institution at the end of 1995. A Tier 1 institution is permitted to make capital distributions during a calendar year up to the greater of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its surplus capital ratio at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four-quarter period. In December 1994, the OTS proposed revisions to its capital distribution regulations to conform with the capital adequacy classification adopted under FDICIA. Under the proposal, savings associations generally would be authorized to make capital distributions so long as they are not deemed in troubled condition and would remain classified as at least adequately capitalized following a proposed distribution. Savings associations held by savings and loan holding companies would still be required to submit prior written notification to the OTS, as is the case at the end of 1995. Charter One's principal source of capital is dividends paid to it by Charter One Bank. In 1995, Charter One Bank paid dividends of $47.5 million to the Company. The above-described regulation on capital distributions does not currently affect the ability of Charter One to pay dividends to its shareholders. See "Item 5. Market for Registrant's Common Stock and Related Stockholder Matters" for dividends paid to shareholders. Deposit Insurance. Charter One Bank's deposits are insured up to $100,000 by the FDIC through the SAIF and backed by the full faith and credit of the United States Government. The Bank is charged an annual premium for this insurance. The rate assessed is based on the capital adequacy and supervisory rating of the institution and is assigned by the FDIC. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the Bank Insurance Fund ("BIF") and the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, SAIF assessments are from .23% to .31% of insured deposits of the institution and BIF assessments are from .00% to .27%, based on the risk the institution poses to its deposit insurance fund. This risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. See "MD&A - Financial Condition - Deposits and Other Sources of Funds" for a discussion of the deposit insurance premium disparity between commercial banks and thrifts. 13 16 Classification of Assets. Federal regulations require savings institutions to review their assets on a regular basis and to classify them as "substandard," "doubtful" or "loss," if warranted. General valuation allowances for loan losses are required to be established, as needed, for assets classified as substandard or doubtful. If an asset is classified as a loss, the institution must either establish a specific valuation allowance equal to the amount classified as a loss or charge off such amount. The institution's OTS Regional Director has the authority to approve, disapprove or modify any asset classification, or the amounts established as allowances for loan losses. Management believes that following these procedures results in a level of valuation allowances that is consistent with generally accepted accounting principles. For additional information, see "Business - Delinquencies and Nonperforming Assets." Community Reinvestment Act. Federally chartered savings associations are subject to regulatory oversight by the OTS under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of an association to open a new branch or engage in a merger transaction. The OTS has recently revised regulations governing community reinvestment to evaluate actual lending and investment within an association's designated service area, with particular emphasis on low-to-moderate income areas and borrowers. These new regulations also evaluate an association's service to low and moderate-income areas in terms of branch locations. The Bank does not anticipate a significant impact on its operations as a result of these revised regulations. Federal Home Loan Bank System. Charter One Bank is a member of the FHLBS, which consists of 12 regional Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board. The FHLBs provide a central credit facility primarily for member institutions by offering funding sources in the form of FHLB advances. As a member of the FHLB of Cincinnati, Charter One Bank is required to acquire and hold shares of capital stock in the FHLB of Cincinnati based on the size of its residential mortgage portfolio and the outstanding FHLB advances and letters of credit. The Bank is also required to hold shares of capital stock in the FHLB of Indianapolis (of which First Federal was a member) until FHLB advances issued to First Federal prior to the Merger mature. Charter One Bank is in compliance with these requirements at December 31, 1995, with a consolidated investment in FHLB stock of $178.1 million. FEDERAL AND STATE TAXATION Federal Taxation. Charter One is subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), which subject corporations to an income tax generally calculated at 35% of taxable income. The Company and its subsidiaries file a consolidated federal income tax return. Savings and loans such as Charter One Bank that meet certain definitional tests and other conditions prescribed by the Code are allowed to establish a bad debt reserve, which may be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction is based upon (i) actual loss experience; or (ii) a percentage of taxable income before such deduction. The bad debt reserve deduction is only available to reduce taxable income of Charter One Bank. Charter One Bank primarily has used the percentage of taxable income method for tax return purposes. Under this method, the bad debt reserve deduction is 8% of taxable income. Under the Tax Reform Act of 1986, no deduction is available to a savings and loan institution under the percentage of taxable income method in the event that less than 60% of the total dollar amount of the assets of the institution falls within certain designated categories. As of December 31, 1995, Charter One Bank's asset composition qualified it to take the maximum allowable bad debt deduction under the percentage of taxable income method. The bad debt deduction under the percentage of taxable income method is subject to additional limitations. It is available only to the extent that the accumulated bad debt reserve for losses on qualifying real property loans does not exceed 6% of such loans at year end. The bad debt deduction is further limited to the amount which, when added to the bad debt reserve for losses on nonqualifying loans, equals the amount by which 12% of total deposits or withdrawable accounts of depositors at year end exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. It is not currently expected that these limitations will restrict Charter One Bank from making the maximum addition to its bad debt reserve. 14 17 Under the experience method, Charter One Bank is permitted to maintain its qualifying bad debt reserve at its December 31, 1987 level as long as its outstanding qualifying real property loans remain at or above the level on that date. Earnings appropriated to Charter One Bank's bad debt reserve and claimed as a tax deduction are not available for the payment of cash dividends or for distribution to shareholders (including distributions made on dissolution or liquidation) without payment of federal income taxes on such dividends or distributions by Charter One Bank, at the then current tax rate, on the amount deemed removed from the bad debt reserve. The amount deemed removed from such reserve and thus treated as income to Charter One Bank would include not only the amount actually distributed, but would also be increased (subject to certain limitations) by the amount of the tax payable by reason of such distribution. As of December 31, 1995, Charter One Bank had approximately $167.8 million of accumulated earnings on which federal income taxes have not been paid. This amount represents allocations of income to bad debt reserve of Charter One Bank through December 31, 1987, for tax computation purposes. At December 31, 1995, the Company had no net operating loss carryforwards for federal income tax purposes. Federal income tax rules allow net operating losses to be carried back three years and carried forward 15 years. Audits of tax returns have been completed by the Internal Revenue Service with respect to tax returns through 1993 for Charter One Bank and through 1988 for FirstFed. However, FirstFed is currently under audit by the Internal Revenue Service with respect to tax returns from 1989 through 1995. No material tax liabilities are outstanding related to tax issues for 1995 and prior years. See Note 1 and Note 14 of the "Notes to Consolidated Financial Statements" for further information concerning the financial statement reporting of federal income taxes of the Company. State Taxation. Charter One is subject to the Ohio franchise tax on holding companies of financial institutions. The tax imposed is the greater of the tax on net worth after adjustments to exclude the portion attributable to the financial institution or the tax on net income. The tax on net income is computed on federal taxable income adjusted to exclude distributions from the financial institutions, and subject to certain other adjustments. The rate of tax differs for the net worth and net income computations and can include a surtax if based on net income and an add-on litter tax under either method. Charter One is also subject to the Delaware franchise tax, which is based on the total number of authorized shares of stock. Charter One Bank is also taxed under Ohio law. Charter One Bank is 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 exempt assets. As a result of the Merger, the resulting net taxable value is apportioned between Ohio and Michigan, with the Ohio portion taxed at a rate of 1.5%. Additionally, as a result of the Merger, the Company is now subject to taxes imposed by the State of Michigan. The Single Business Tax ("SBT") is the primary tax, and is a value-added type of tax for the privilege of doing business in the State of Michigan and carries a tax rate of 2.30%. The major components of the tax base are: compensation, federal taxable income and depreciation, less the cost of acquisition of tangible assets during the year. Charter One and its Michigan subsidiaries file separate returns. The Bank is also subject to an Intangibles Tax of $.20 on each $1,000 of Michigan savings deposits, which amounted to $367,000 for 1995. The State of Michigan had audited First Federal through 1990. No material tax liabilities are outstanding related to tax issues for 1990 and prior years. SBT rules have no net operating loss carryback provisions; however, losses may be carried forward for 10 years. Because of FirstFed's loss in 1994, the Company had a net operating loss carryforward for SBT purposes of approximately $52 million at December 31, 1995. 15 18 EXECUTIVE OFFICERS Executive Officers of the Registrant. The executive officers of the Company, each of whom is currently an executive officer of the Bank, are identified below. The executive officers of the Company are elected annually by its Board of Directors to serve until the next annual election of officers following the annual meeting of shareholders.
Age at December Officer Name 1995 Position With The Company Since ----- ------- ------------------------- ------ Charles John Koch . . . . . 49 Chairman of the Board, President and 1987 Chief Executive Officer Mark D. Grossi . . . . . . 42 Senior Vice President 1992 John David Koch . . . . . . 43 Senior Vice President 1987 Richard W. Neu . . . . . . 39 Senior Vice President and Treasurer 1995 Robert J. Vana . . . . . . 46 Chief Corporate Counsel and Corporate Secretary 1987
Executive Officers of the Bank. The following table sets forth certain information regarding the executive officers of the Bank. The executive officers of the Bank are elected annually by the Board of Directors to serve until the next annual election of officers.
Age at December Officer Name 1995 Position With The Bank Since ------- ------- ------------------------- ------- Charles John Koch . . . . . 49 Chairman of the Board, President and 1976 Chief Executive Officer Mark D. Grossi . . . . . . 42 Executive Vice President, Retail Banking 1992 John David Koch . . . . . . 43 Executive Vice President, Lending and Credit 1982 Administration and President of First Financial Services and Development Corporation Richard W. Neu . . . . . . 39 Executive Vice President and Chief Financial 1995 Officer Robert J. Vana . . . . . . 46 Senior Vice President and Corporate Secretary 1982
Charles John Koch has been President of Charter One Bank since 1980 and was Chief Operating Officer of Charter One from 1980 to 1988, when he was appointed Chief Executive Officer of Charter One. In February 1995, he was appointed Chairman of the Board of the Company and of the Bank. Mr. Koch is the brother of John David Koch. Mark D. Grossi has been Senior Vice President of the Company and an Executive Vice President of the Bank, responsible for retail banking and branch administration, since the Company's merger with First American Savings Bank in September 1992. Prior to the merger, he was President and Chief Executive Officer of First American from December 1989 and the President and Chief Operating Officer from 1987 to 1989. John David Koch joined the Bank in 1982 and is a Senior Vice President of the Company and an Executive Vice President of the Bank. Mr. Koch is responsible for the Credit and Lending functions of the Bank and has management responsibility for numerous service corporations. In February 1995, he was elected as a Director of the Company and of the Bank. Mr. Koch is the brother of Charles John Koch. Richard W. Neu is Senior Vice President and Treasurer of Charter One Financial, Inc., and is Executive Vice President and Chief Financial Officer of its wholly owned subsidiary, Charter One Bank, F.S.B. He joined Charter One from First Federal of Michigan upon the Merger. He had served as Executive Vice President and Chief Financial Officer of First Federal since 1989, and joined First Federal in 1985. Robert J. Vana has been Chief Corporate Counsel and Corporate Secretary of the Company since 1988 and joined the Bank as Senior Vice President and Corporate Secretary in 1982. 16 19 ITEM 2. PROPERTIES Charter One Bank's executive offices are located at 1215 Superior Avenue, Cleveland, Ohio in a seven-story office building owned by a subsidiary of the Bank. The bank operates a branch facility in the building and leases a portion of the office space. Charter One Bank also maintains an operations center in a single-story building owned by the Bank and located in Cleveland, Ohio. The Bank owns various other office buildings including a 23-story office building in Detroit, nine-story office building in Toledo, and a four-story office building in downtown Canton. The buildings in Detroit, Toledo and Canton each include space for a branch office and various divisional administrative functions, with any remaining space leased to tenants. Charter One Bank conducts business from 94 banking offices located throughout Ohio, 61 banking offices in Michigan and 9 loan production offices in Ohio, Michigan, Indiana and Kentucky. The Bank operates 125 ATM's at various of its branch offices and is a member of the Money Access Center System ("MAC"), which provides its customers access to ATMs nationwide. A summary of the Bank's banking and loan production offices by market area is presented in the table below. The lease terms for branch offices are not individually material. Terms range from monthly to seven years.
Metropolitan Area Owned Leased Total ----------------- ------ ------ ----- Ohio Cleveland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 19 46 Akron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7 12 Columbus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2 2 Youngstown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 3 Toledo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1 20 Portsmouth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - 2 Canton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4 14 ---- ---- ---- Ohio total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 34 99 ---- ---- ---- Indiana and Kentucky - 2 2 Michigan Detroit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2 54 Grand Rapids . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - 1 Kalamazoo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 4 Lansing/Owosso . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 4 ---- ---- ---- Michigan total . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4 63 ---- ---- ---- Total banking and loan production offices . . . . . . . . . . . 124 40 164 ==== ==== ====
ITEM 3. LEGAL PROCEEDINGS The Bank and its subsidiaries are involved as plaintiff or defendant in various actions incident to their business, none of which is believed by management to be material to the financial condition of the Bank, except as discussed below. Prior to the Merger, Charter One and First Federal each filed a lawsuit against the United States Government based upon the breach of certain agreements between Charter One and First Federal (individually) and the former Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation involving supervisory goodwill in the aggregate amount of approximately $118 million. CHARTER ONE BANK, F.S.B. vs. THE UNITED STATES, No. 95-528(c) was filed in the Court of Federal Claims on August 8, 1995. FIRST FEDERAL OF MICHIGAN vs. THE UNITED STATES, No. 95-464(c), was filed in the Court of Federal Claims on July 20, 1995. The lawsuits are presently stayed pending the outcome of WINSTAR CORPORATION vs. THE UNITED STATES OF AMERICA, which is scheduled to be decided by the Supreme Court of the United States. While management believes, based upon the advice of legal counsel, that its claims are meritorious, no assurances can be given as to the final outcome of the litigation. 17 20 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter ended December 31, 1995 other than the special meeting held on October 27, 1995, to consider the Merger. Results of that meeting were reported on the Form 8-K for the event on October 31, 1995. 18 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS See "MD&A - Capital and Dividends" for information required by this item. ITEM 6. SELECTED FINANCIAL DATA
AT AND FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA(2): Interest income . . . . . . . . . . . . $ 1,087,410 1,006,180 1,082,156 1,131,758 1,259,296 Interest expense . . . . . . . . . . . 769,594 694,207 774,762 884,752 1,050,351 --------- --------- --------- --------- --------- Net interest income . . . . . . . . . . 317,816 311,973 307,394 247,006 208,945 Provision for loan and lease losses . . 1,032 2,948 7,549 12,544 14,260 Net interest income after provision --------- --------- --------- ------- -------- for loan and lease losses . . . . . . 316,784 309,025 299,845 234,462 194,685 Other income: Net gain (loss) . . . . . . . . . . . (92,303) (145,786) 6,832 25,078 58,877 Other . . . . . . . . . . . . . . . . 44,467 35,397 33,027 28,414 31,190 Administrative expenses . . . . . . . . 215,743 175,961 178,889 167,516 166,929 Income before income taxes, -------- ------- ------- ------- ------- extraordinary item and cumulative effect of accounting change. . . . . . 53,205 22,675 160,815 120,438 117,823 Federal income taxes . . . . . . . . . 19,173 7,056 56,415 42,270 42,857 Income before extraordinary item -------- -------- ------- ------- ------- and cumulative effect of accounting change . . . . . . . . . . 34,032 15,619 104,400 78,168 74,966 Extraordinary item - early extinguishment of debt . . . . . . . . - (12,348) - - (66) Cumulative effect of accounting change(1) . . . . . . . . . . . . . . - - - 14,825 - ------- ------- ------- -------- ------- Net income . . . . . . . . . . . . . . $ 34,032 3,271 104,400 92,993 74,900 Earnings per common and common ======= ======= ====== ======= ======= equivalent share(2): Primary: Income before extraordinary item and accounting change . . . . . . . $ .74 .34 2.29 1.96 1.91 Extraordinary item - early extinguishment of debt . . . . . . . - (.27) - - - Cumulative effect of accounting change . . . . . . . . . . . . . . . - - - .37 - ------- ----- ----- ------ ------ Net income . . . . . . . . . . . . . $ .74 .07 2.29 2.33 1.91 Dividends declared and paid per ====== ====== ====== ====== ======= common share(3) . . . . . . . . . . . $ .75 .59 .42 .31 .28 Common stock price range: High . . . . . . . . . . . . . . . . 33.38 24.00 25.00 20.00 14.22 Low . . . . . . . . . . . . . . . . . 18.88 17.75 17.00 11.33 5.55 Dividend payout ratio . . . . . . . . . 101.35% * 18.34% 13.30% 14.66% - -------------------------- * Not meaningful. (1) During 1992, the Company changed its method of accounting for income taxes by adopting Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." (2) During 1995 and 1992, the Company completed mergers which were accounted for as a pooling of interests. Results have been restated to reflect the pooling of interests. (3) The amounts presented herein are historical per share amounts declared and paid by the Company, as adjusted for stock splits, prior to mergers accounted for as a pooling of interests.
19 22
AT AND FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FINANCIAL CONDITION AND OTHER DATA: Cash, federal funds sold and other $ 658,371 341,935 271,643 266,060 307,252 Investment securities . . . . . . . 407,427 467,247 428,579 687,285 1,454,791 Mortgage-backed securities . . . . 5,314,749 6,628,591 6,718,615 5,946,949 5,312,151 Loans and lease financings, net . . 6,678,600 6,592,975 6,562,088 6,234,954 6,152,302 Other assets . . . . . . . . . . . 519,712 491,432 466,583 499,612 512,888 ---------- --------- --------- --------- --------- Total assets . . . . . . . . . . $ 13,578,859 14,522,180 14,447,508 13,634,860 13,739,384 ========== ========= ========= ========= ========= Deposits . . . . . . . . . . . . . $ 7,012,491 7,089,153 7,280,125 7,088,649 7,610,475 FHLB advances . . . . . . . . . . . 3,163,144 2,968,290 2,316,523 2,203,627 1,834,359 Other borrowings . . . . . . . . . 2,298,540 3,415,305 3,692,732 3,275,105 3,227,041 Other liabilities . . . . . . . . . 260,286 225,761 255,889 333,628 417,545 Shareholders' equity (substantially restricted) . . . . 844,398 823,671 902,239 733,851 649,964 Total liabilities and --------- --------- --------- --------- --------- equity . . . . . . . . . . . . . $ 13,578,859 14,522,180 14,447,508 13,634,860 13,739,384 ========== ========== =========== =========== ========== Total assets as initially $ 13,578,859 6,130,172 5,215,426 4,261,850 3,665,755 Loan servicing portfolio . . . . . $ 1,181,245 883,399 960,318 1,223,993 1,901,080 Number of offices: Full service branches . . . . . . 155 157 170 173 173 Loan production offices . . . . . 9 6 3 4 7 Number of shares outstanding . . . 45,017,526 44,992,650 44,890,804 39,057,606 38,731,889 Book value per share . . . . . . . $18.76 18.31 20.10 18.79 16.78 SELECTED RATIOS: Net yield on average interest- earning assets . . . . . . . . . . 2.24% 2.25% 2.18% 1.86% 1.56% Interest rate spread during Return on average . . . . . . . . . 2.00 2.02 1.89 1.53 1.18 shareholders' equity . . . . . . . 3.93 .39 12.28 13.49 12.19 Return on average shareholders' equity as initially reported(2) 3.93 17.92 20.13 18.70 19.40 Return on average shareholders' equity (prior to extraordinary item and cumulative effect of accounting change) . . . . . . . . 3.93 1.87 12.28 11.34 12.20 Return on average assets . . . . . .23 .02 .72 .68 .54 Return on average assets (prior to extraordinary item and cumulative effect of accounting change) . . . .23 .11 .72 .57 .54 Average shareholders' equity to average assets . . . . . . . . . . 5.91 5.84 5.84 5.01 4.45 Total shareholders' equity to total assets (at end of year) . . . . . 6.22 5.67 6.24 5.38 4.73 Efficiency ratio(3) . . . . . . . . 59.34 50.48 52.12 60.14 68.19 Administrative expenses to average assets . . . . . . . . . . 1.47 1.23 1.23 1.22 1.21 Net interest income to administrative expenses . . . . . 1.47x 1.77x 1.72x 1.47x 1.25x - ----------------------- (1) The amounts presented represent total assets as initially reported in the respective year's annual report to shareholders. (2) The amounts presented represent return on average shareholders' equity as initially reported in the respective year's annual report to shareholders. (3) Excluding merger expenses of $37.5 million, the 1995 efficiency ratio was 48.98%.
20 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following financial review presents an analysis of the asset and liability structure of the Company and a discussion of the results of operations for each of the periods presented in the annual report and sources of liquidity and capital resources. HOLDING COMPANY BUSINESS - ------------------------ Charter One Financial, Inc. ("Charter One" or the "Company") is a Delaware Corporation organized as a unitary savings and loan holding company and owns all of the outstanding capital stock of Charter One Bank, F.S.B. (the "Bank"). The business of the Bank and, therefore, the Company is providing consumer and business banking services to certain major markets in Ohio and, as of November 1995, in Michigan. At the end of 1995, the Bank was doing business through 155 full service banking branches and 9 loan production offices. Much of the Company's growth in recent years has been through merger and acquisition. On October 31, 1995, Charter One completed the most significant merger in its history when it combined with FirstFed Michigan Corporation ("FirstFed") in a merger of equals (the "FirstFed Merger") which was accounted for as a pooling of interests and accordingly, the financial statements for the Company for all periods prior to the merger have been restated to include the results of FirstFed. FirstFed was the holding company for First Federal of Michigan ("First Federal"), a $7.7 billion savings and loan headquartered in Detroit, Michigan. See Note 2 to the Consolidated Financial Statements for further information concerning this merger. GENERAL - ------- The Bank's net income generally depends upon its net interest income, which is the difference between the interest and dividend income earned on its loans and investments and the interest expense on its deposits and borrowings. The Bank's net interest income is significantly affected by general economic conditions and policies of regulatory authorities. From time to time, unusual events can have a significant, nonrecurring effect on net income. Such events include regulatory actions, changes in accounting methods and transitional activities related to mergers and acquisitions. As discussed below, the FirstFed Merger had a major impact on 1995 results. Additionally, because the transaction was accounted for as a pooling of interests, it had a similar restructuring impact on combined results reported for 1994. Because of the size, timing and nature of the FirstFed Merger, much of the discussion here as it relates to historical results can not be meaningfully applied to future results and operations. RESULTS OF OPERATIONS - --------------------- For the year ended December 31, 1995, Charter One reported net income of $34.0 million, compared to $3.3 million and $104.4 million in the years ended December 31, 1994 and 1993, respectively. On a per share basis, net income was $.74, $.07 and $2.29 in 1995, 1994, and 1993, respectively. As discussed below, the FirstFed Merger had a significant impact on 1995 and 1994 results. IMPACT OF FIRSTFED MERGER 1995 Impact An integral component of the FirstFed Merger was a plan to reposition the combined balance sheet in order to reduce the wholesale component of the Company's operation and conform the interest rate risk profile to that of Charter One before the merger. This plan, which was fully executed by year-end 1995, included the fourth quarter sale of $940 million of fixed, low-rate mortgage-backed securities, the sale of $330 million of fixed, low-rate mortgage loans, and a $740 million reduction in maturing agency investments. Proceeds from these sales and maturities were used to repay approximately $1.5 billion of short-term borrowings. Additionally, management took advantage of a relatively flat yield curve to lengthen the maturity of $900 million in medium-term borrowings. Finally, $750 million in interest rate exchange agreements ("swaps") and $800 million in interest rate cap agreements ("caps") were eliminated. The charges 21 24 related to the repositioning and those related to the merger itself totaled $92.6 million, after tax, and are summarized below.
Effect on Year Ended December 31, 1995 -------------------- Pretax After ------ ----- (dollars in thousands) Merger expenses: Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,900) (5,900) Severance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,715) (12,163) Other costs to combine operations . . . . . . . . . . . . . . . . . . . . . . . (12,913) (8,392) -------- ------- Total merger expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,528) (26,455) Loss on loans and securities . . . . . . . . . . . . . . . . . . . . . . . . . . (25,545) (16,605) Termination of swaps and caps . . . . . . . . . . . . . . . . . . . . . . . . . . (76,207) (49,534) -------- ------ Impact of repositioning and merger expenses on 1995 results . . . . . . . . . . $ (139,280) (92,594) ======== ======
1994 Impact FirstFed reported a net loss for 1994 which, because of pooling of interests accounting, is now reflected in Charter One's consolidated results for 1994. FirstFed's loss was the result of a financial restructuring undertaken in the first quarter of 1994, based upon an evaluation of its existing capital position and then current market conditions with a goal of increasing future core earnings and improving the corporation's overall financial profile. The major components of the restructuring were: (i) reducing mortgage-backed securities by $1.1 billion, (ii) terminating $900 million of interest rate swaps and eliminating the liabilities to which they were specifically assigned; (iii) extinguishing $194 million of FHLB advances; (iv) recording a $52.7 million federal income tax benefit, and (v) adopting SFAS No. 72 to change the accounting for goodwill. When originally reported, the aggregate effect from these transactions was a net charge to FirstFed's after-tax net earnings of $146 million. However, in accounting for the FirstFed Merger, timing of the adoption of SFAS No. 72 was conformed to Charter One's adoption date of January 1, 1990, which reduced the net charge to the combined after-tax net earnings for 1994 to $114 million. 1993 Impact There were no unusual items of note that affected the 1993 combined results. PERFORMANCE OVERVIEW Charter One's net income of $34.0 million for 1995 was significantly affected by the financial repositioning undertaken in conjunction with the FirstFed Merger. Excluding the impact of the repositioning and merger expenses, net earnings for 1995 were $126.6 million, or $2.76 per share. Charter One's core earnings for 1995, which exclude the merger-related items as well as other nonrecurring gains and losses, were the highest in its history at $183 million, up $15 million, or 9%, over 1994 and up $26 million, or 16%, over 1993. The following table summarizes the components of pretax core earnings.
Year Ended December 31, ----------------------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Net interest income . . . . . . . . . . . . . . . . . . $ 317,816 311,973 307,394 Provision for losses . . . . . . . . . . . . . . . . . (1,032) (2,948) (7,549) Other income, excluding gains and losses . . . . . . . 44,467 35,397 33,027 Administrative expenses . . . . . . . . . . . . . . . . (178,215) (175,961) (175,589) -------- -------- -------- Pretax core earnings . . . . . . . . . . . . . . . . $ 183,036 168,461 157,283 ======= ======= ========
In general, the above comparison reflects consistent growth in net interest income, the Company's low credit risk as characterized by modest provision levels and an increasing percentage of core earnings being derived by non-interest income. Additionally, the table illustrates the Company's efforts to control overhead costs with an efficiency ratio 22 25 (excluding merger-related expenses) of 49% in 1995 and 50% and 51% in 1994 and 1993, respectively. The efficiency ratio is the ratio of administrative expenses (excluding goodwill amortization) to net interest income and other income exclusive of net gains and losses. NET INTEREST INCOME Net interest income is the principal source of earnings for the Company. It is affected by a number of factors including the level, pricing and maturity of interest-earning assets and interest-bearing liabilities, interest rate fluctuations and asset quality. Net interest income for 1995 was $317.8 million, an increase of $5.8 million, or 1.9%, over net interest income in 1994. The yield on interest-earning assets increased by 40 basis points in 1995 as compared to the yield in 1994. This increase was due to higher market interest rates in 1995. Also, assets were shifted out of lower yielding mortgage-backed securities available for sale and re-invested in higher yielding mortgage-backed securities, investment securities and loans. During the same period, the cost of interest-bearing liabilities increased by 42 basis points. This was due to higher market interest rates and customers shifting retail deposits from core accounts to certificates of deposit. The average balance of retail certificates of deposit was $480.4 million higher in 1995 than 1994. Conversely, core deposit average balances (checking, savings and money market accounts) were $329.3 million lower in 1995 as compared to 1994. The change in the mix of the deposit balances accounted for $23.6 million of the $41.1 million increase in deposit interest expense. This resulted in the interest rate spread decreasing by 2 basis points to 2.00% for 1995. The net yield on average interest-earning assets was 2.24% in 1995 as compared to 2.25% for 1994. The at period end net yield on interest-earning assets was 2.78% at December 31, 1995. The improvement was primarily due to the previously discussed financial repositioning that was executed in the fourth quarter of 1995. Net interest income for 1994 was $312.0 million as compared to $307.3 million for 1993. This $4.6 million, or 1.5%, increase was primarily due to the cost of interest-bearing liabilities decreasing faster than the yield on interest-earning assets. The cost of interest- bearing liabilities was 55 basis points less in 1994 than in 1993. The yield on interest-earning assets decreased by 42 basis points in 1994 as compared to 1993. This resulted in the interest rate spread increasing to 2.02% in 1994 as compared to 1.89% for 1993. The net yield on average interest-earning assets increased by 7 basis points to 2.25% for 1994 from 2.18% in 1993. 23 26 The following table shows average balances, interest earned or paid and average interest rates for the years indicated. Average balances are calculated on a daily basis. AVERAGE BALANCES, INTEREST AND YIELDS/COSTS
Year Ended December 31, ----------------------------------------------------------------------------------------- 1995 1994 1993 ------------------------ -------------------------- -------------------------- Avg. Avg. Avg. Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- ------- ----- ------- -------- ----- -------- -------- ---- Interest-earning (dollars in thousands) assets: Loans and lease financings(1)...... $6,702,155 $ 557,936 8.32% $ 6,577,988 $ 532,719 8.10% $ 6,763,975 $ 585,859 8.66% Mortgage-backed securities: Available for sale 368,526 23,820 6.46 1,137,084 64,482 5.67 339,683 20,946 6.17 Held to maturity 5,808,992 418,344 7.20 5,326,992 364,306 6.84 6,028,176 423,345 7.02 Investment securities: Available for sale 893,433 59,746 6.69 418,125 26,122 6.25 6,597 309 4.68 Held for investment....... - - - - - - 561,648 33,233 5.92 Other interest- earning assets .... 412,543 27,564 6.68 375,819 18,551 4.94 375,752 18,464 4.91 ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- ----- Total interest- earning assets 14,185,649 1,087,410 7.67 13,836,008 1,006,180 7.27 14,075,831 1,082,156 7.69 ---------- ---------- ---------- Noninterest-earning assets(2) ......... 478,640 486,209 481,932 ----------- ----------- ----------- Total assets..... $14,664,289 $ 14,322,217 $ 14,557,763 =========== =========== =========== Interest-bearing liabilities: Deposits: Checking, savings and money market accounts $2,577,863 62,582 2.43 $ 2,907,169 70,108 2.41 $ 2,853,431 74,322 2.60 Certificates of deposit ........ 4,614,460 284,023 6.16 4,077,693 235,386 5.77 4,659,046 289,532 6.21 ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- ----- Total deposits 7,192,323 346,605 4.82 6,984,862 305,494 4.37 7,512,477 363,854 4.84 ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- ----- FHLB advances....... 2,902,779 177,704 6.12 2,770,428 150,744 5.44 2,336,671 142,088 6.08 Other borrowings.... 3,467,715 245,285 7.07 3,474,927 237,969 6.85 3,520,216 268,820 7.64 ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- ----- Total borrowings.. 6,370,494 422,989 6.64 6,245,355 388,713 6.22 5,856,887 410,908 7.02 ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- ----- Total interest- bearing liablities........ 13,562,817 769,594 5.67 13,230,217 694,207 5.25 13,369,364 774,762 5.80 ---------- ---------- ---------- Noninterest-bearing liabilities........ 235,003 255,259 338,309 ----------- ----------- ----------- Total liabilities 13,797,820 13,485,476 13,707,673 Shareholders' equity 866,469 836,741 850,090 ----------- ----------- ----------- Total liabilities and share- holders' equity $14,664,289 $ 14,322,217 $ 14,557,763 =========== =========== =========== Net interest income $ 317,816 $ 311,973 $ 307,394 ========== ========== ========== Interest rate spread 2.00 2.02 1.89 ==== ==== ==== Net yield on average interest-earning assets . . . . 2.24 2.25 2.18 ==== ==== ==== Average interest- earning assets to average interest- bearing liabilities 104.6% 104.6% 105.3% ===== ===== ===== - ------------------------- (1) Nonaccrual loans are included in the average balance. (2) Includes mark-to-market adjustments on securities available for sale.
24 27 The following rate-volume analysis shows the approximate relative contribution of changes in average interest rates and volume to changes in net interest income for the years indicated. RATE/VOLUME ANALYSIS
Year Ended December 31, 1995 v. 1994 Year Ended December 31, 1994 v. 1993 ------------------------------------- ----------------------------------- Increases (Decrease) Due To Increase (Decrease) Due To ---------------------------- -------------------------- Rate(1) Volume(1) Total Rate(1) Volume(1) Total ------- -------- ----- ------- -------- ----- (dollars in thousands) Interest income: Loans and leases . . . . . . . . $ 15,048 10,169 25,217 (37,342) (15,798) (53,140) Mortgage-backed securities: Available for sale . . . . . . 7,973 (48,635) (40,662) (1,814) 45,350 43,536 Held to maturity . . . . . . . 19,971 34,067 54,038 (10,849) (48,190) (59,039) Other securities: Available for sale . . . . . . 1,961 31,663 33,624 137 25,676 25,813 - - - - - - Other interest-earning assets . . 7,056 1,957 9,013 (16,684) (16,613) (33,287) ----- ------ ------ ------ ------ ------- Total . . . . . . . . . . . . 52,009 29,221 81,230 (66,401) (9,575) (75,976) Interest expense: ------ ------ ------ ------ ----- ------ Checking, savings and money market accounts . . . . . 1,316 (8,842) (7,526) (5,593) 1,379 (4,214) Certificates of deposit . . . . . 16,197 32,440 48,637 (19,654) (34,492) (54,146) FHLB advances . . . . . . . . . . 19,510 7,450 26,960 (15,949) 24,605 8,656 Other borrowings . . . . . . . . 7,811 (495) 7,316 (27,433) (3,418) (30,851) ----- ------ ---- ----- ---- ------ Total . . . . . . . . . . . . 44,834 30,553 75,387 (68,629) (11,926) (80,555) ----- ------ ------ ------ ------ ------ Change in net interest income . . . $ 7,175 (1,332) 5,843 2,228 2,351 4,579 ===== ===== ===== ===== ===== ===== - ---------------------- (1) Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate.
PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses represents a charge against current earnings in order for management to maintain the allowance for loan and lease losses at a level that will absorb estimated future loan and lease charge-offs. The provision for loan and lease losses was $1.0 million in 1995 as compared to $2.9 million in 1994 and $7.5 million in 1993. The decrease in the provision was primarily due to improvements in the nonperforming loan and lease balances and actual loss experience. Nonperforming loans and leases as a percentage of total loans and leases were .65% at December 31, 1995. This was an improvement over the December 31, 1994 and 1993 ratios of .75% and .96%, respectively. Net loan and lease charge-offs have remained low. They were .02%, .04% and .06% of average loan and lease balances for 1995, 1994 and 1993, respectively. For a further discussion about nonperforming assets and the allowance for loan and lease losses - see "Financial Condition - Loans and Leases". OTHER INCOME Other income for 1995 was a negative $47.8 million as a result of the balance sheet repositioning implemented in conjunction with the previously discussed FirstFed Merger. Income from leasing operations contributed $7.9 million to other income in 1995. There was no comparable amount in 1994 as the acquisition of ICX Corporation ("ICX") occurred in January of 1995. See Note 2 to the Consolidated Financial Statements for a further discussion of the ICX acquisition. Service fees and other charges increased by $2.2 million, or 9.1%, in 1995 as compared to 1994. This was primarily due to increases in checking account and ATM fee income. Management will attempt to continue this growth in checking account and ATM fee income by introducing Charter One's checking account products and pricing strategy in the Michigan market in 1996. These two increases in fee income were partially offset by a decrease in loan servicing fees of $1.2 million. This decrease was primarily due to lower average balances of loans serviced for others. This balance was decreasing due to repayments of the existing portfolio and fewer loan sales that would have increased the loans serviced for others portfolio. Sales were lower as management was building the balance of loans in the Bank's own portfolio in an effort to increase the Bank's yield on interest-earning assets. Other income for 1994 was a negative $110.4 million due to the loss on the termination of interest rate exchange agreements associated with FirstFed's 1994 restructuring, as previously discussed. There was no similar event in 1993. 25 28 Excluding that loss, other income for 1994 was $45.0 million as compared to $39.9 million in 1993. This $5.1 million increase was due to increases in services fees and other charges as well as larger net gains on sales in 1994 than in 1993. These increases were partially offset by lower loan servicing fees. Loan servicing fees for 1994 were 6.4% lower than 1993 due to lower prepayment penalty fees collected on commercial real estate loans paid off and mortgage-backed securities which were called as a result of "clean-up" provisions in the security structure. These fees were approximately $400,000 less in 1994 as compared to 1993. Service fees and other charges increased $3.7 million to $24.4 million in 1994 as compared to $20.7 million in 1993. This 18.0% increase was primarily due to increases in retail deposit account service charges and fees, which resulted from increases in both the volume of checking accounts and ATM transactions and the per transaction charges for these accounts and transactions. ADMINISTRATIVE EXPENSES Administrative expenses in 1995 were $215.7 million. Included in that amount were one-time expenses of $37.5 million related to the FirstFed Merger. There were no comparable merger-related expenses in 1994. Excluding the 1995 merger-related expenses, administrative expenses were $178.2 million compared to $176.0 million for 1994, an increase of $2.3 million, or 1.3%. This increase was primarily due to salaries and employee benefits expenses which increased by $5.5 million, or 6.6%. That increase was partially offset by reductions in other administrative expenses. Compensation and employee benefits expenses increased primarily due to increases in the number of employees. In January of 1995, Charter One acquired two new subsidiaries, ICX Corporation and Accredited Computer Services. Those acquisitions were the primary reasons the employee count and, consequently, compensation and employee benefits expense increased in 1995. Other administrative expenses were lower in 1995 as a result of the discontinuance of FirstFed's Virginia and Grand Rapids, Michigan branch operations in 1994. Administrative expenses for 1995, excluding merger-related expenses, were 1.22% of average assets compared to 1.23% for 1994. The Company's efficiency ratio, excluding the one-time merger-related expenses, was 48.98% for 1995 as compared to 50.48% for 1994. Administrative expenses in 1994 were $176.0 million as compared to $178.9 million in 1993, a decrease of $2.9 million, or 1.6%. The decrease was primarily due to $2.3 million in severance payments and $1.0 million lease termination costs in 1993 related to the acquisition of Women's Federal Savings Bank. Compensation and employee benefits expense increased by $1.8 million, or 2.2%, to $83.7 million in 1994. This increase was a result of deferring fewer costs to originate loans in 1994 than 1993 due to lower loan volumes in 1994. This increase to compensation and employee benefits expense was partially offset by the discontinuance of FirstFed's operations in South Carolina in 1993, as well as Virginia and Grand Rapids, Michigan in the fourth quarter of 1994. Net occupancy and equipment expense was $24.5 million for 1994 as compared to $25.5 million in 1993. This $914,000 decrease was primarily due to the discontinuance of operations by FirstFed in South Carolina in 1993. See "Financial Condition - Deposits and Other Sources of Funds" for a discussion of the potential impact of a one-time assessment to recapitalize the Savings Association Insurance Fund. FEDERAL INCOME TAX EXPENSE The provision for federal income taxes for 1995 was $19.2 million as compared to $7.1 million for 1994. The primary reason for this increase was due to the increase in pre-tax book income. Pre-tax book income was $30.5 million higher in 1995 than 1994. The effective tax rates for 1995 and 1994 were 36% and 31%. For further information concerning the effective tax rates see Note 14 to the Consolidated Financial Statements. The provision for federal income taxes for 1994 decreased $49.4 million from 1993, due primarily to lower income before taxes in 1994 than 1993. The effective tax rates were 31% and 35% for 1994 and 1993, respectively. For further information concerning the effective tax rates see Note 14 to the Consolidated Financial Statements. 26 29 ASSET/LIABILITY MANAGEMENT - -------------------------- Interest rate sensitivity gap ("gap") analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates. Gap analysis has limitations because it cannot measure the effect of interest rate movements and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. In addition, a significant portion of the Company's adjustable-rate assets have limits on their maximum yield, whereas most of its interest-bearing liabilities are not subject to such limitations. As a result, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different volumes, and certain adjustable rate assets may reach their yield limits and not reprice. 27 30 The following table presents an analysis of the Company's interest-sensitivity gap position at December 31, 1995. Asset prepayment and liability decay rates are selected after considering the current rate environment, industry prepayment and decay rates, the Company's historical experience, and the repricing and prepayment characteristics of portfolios acquired through merger. Mortgage-backed securities committed to be sold are in the 0-6 Months column. All other interest-earning assets and interest-bearing liabilities are shown based on their contractual maturity or repricing date adjusted by forecasted prepayment and decay rates. MATURITY/RATE SENSITIVITY
December 31, 1995 ------------------------------------------------------------------------------ Over 0-6 7-12 1-3 3-5 5-10 10 Months Months Years Years Years Years Total ------ ------ ----- ----- ----- ----- ----- (dollars in thousands) Interest-earning assets: Real estate mortgage loans and mortgage- backed securities: Adjustable rate..... $3,311,330 925,341 319,960 79,416 3,604 - 4,639,651 Fixed rate.......... 1,082,528 649,954 1,867,092 1,136,575 1,346,566 489,457 6,572,172 Business loans........ 47,209 338 1,741 6,547 484 4,339 60,658 Consumer loans........ 283,578 37,625 103,759 86,465 68,300 10,520 590,247 Lease financings...... 19,709 19,710 56,411 23,372 11,419 - 130,621 Investment securities, federal funds sold, interest-bearing deposits and other interest-earning assets............... 921,696 73,827 - 85,254 539 1 1,081,317 ---------- -------- --------- --------- --------- ------- ---------- Total............ 5,666,050 1,706,795 2,348,963 1,417,629 1,430,912 504,317 13,074,666 ---------- --------- --------- --------- --------- ------- ========== Interest-bearing Liabilities: Deposits: Checking and savings accounts.... 81,414 73,972 1,160,416 425,338 - - 1,741,140 Money market accounts............ 829,086 - - - - - 829,086 Certificates of deposit............. 2,107,481 1,095,917 784,729 211,440 239,784 2,914 4,442,265 FHLB advances......... 1,983,009 244,555 551,835 355,052 20,442 8,251 3,163,144 Other borrowings...... 1,735,174 84,256 216,845 113,868 146,585 1,812 2,298,540 --------- --------- -------- --------- --------- ------- ---------- Total............ 6,736,164 1,498,700 2,713,825 1,105,698 406,811 12,977 12,474,175 ---------- --------- --------- --------- --------- ------- ========== Excess (deficiency) of interest-earning assets over interest-bearing liabilities............ (1,070,114) 208,095 (364,862) 311,931 1,024,101 491,340 Impact of interest rate caps.............. 1,486,987 (579,487) (907,500) - - - Impact of interest rate swap agreements........ 241,214 (155,000) 7,275 (93,489) - - --------- --------- --------- --------- --------- ------- Adjusted interest- sensitivity gap........ $ 658,087 (526,392) (1,265,087) 218,442 1,024,101 491,340 ========= ======== ========== ========= ========= ======= Cumulative excess of interest-earning assets over interest- bearing liabilities.... 658,087 131,695 (1,133,392) (914,950) 109,151 600,491 ========= ======== ========== ========= ========= ======= Cumulative interest- sensitivity gap as a percentage of total assets at December 31, 1995................... 4.8% 1.0% (8.3)% (6.7)% 0.8% 4.4% === === ==== ==== === === Cumulative interest- sensitivity gap as a a percentage of total assets at December 31, 1994...... 5.3% (0.5)% (17.2)% (16.3)% (3.5)% 4.2% === ===== ===== ===== ===== ===
One of the principal operating strategies of Charter One has been to better match the terms to repricing of its interest rate-sensitive assets and liabilities to manage the sensitivity of the Company's earnings to changes in interest rates. Charter One's principal efforts in this strategy include (i) originating and retaining adjustable rate loans with shorter terms or more frequent repricing than fixed-rate mortgage loans, while offering sufficiently attractive yields to provide profitable margins over the Company's cost of funds, and (ii) lengthening the maturities of its interest-bearing liabilities. Management's goal is to manage the Company's interest rate risk by maintaining the gap between interest-earning assets and interest-bearing liabilities repricing within a one-year period to plus or minus 5% of total assets. As of December 31, 1995, the Company had a limited number of swaps and caps in place to manage interest rate risk of borrowings and deposit liabilities. See Note 13 of the Consolidated Financial Statements for additional information. 28 31 FINANCIAL CONDITION - ------------------- Consolidated assets of Charter One Financial, Inc., substantially all held by its thrift subsidiary, Charter One Bank, F.S.B., were $13.6 billion at December 31, 1995, down $943.3 million, or 6.5% from December 31, 1994. The decrease in assets was primarily due to the financial repositioning accomplished in the fourth quarter of 1995 in conjunction with the FirstFed Merger. Mortgage-backed securities decreased by $1.3 billion in 1995. The proceeds from the sales of $940 million of fixed, low rate mortgage-backed securities as part of the fourth quarter financial repositioning was used to repay short-term borrowings. That is the primary reason reverse repurchase agreements decreased by $1.2 billion by year-end 1995. See "Results of Operations - Impact of FirstFed Merger - 1995 Impact" for additional information. LOANS AND LEASES Total loans and leases held for investment outstanding at December 31, 1995 were $6.7 billion, as compared to $6.6 billion at December 31, 1994. The $86.7 million increase was primarily due to the acquisition of ICX Corporation by the Bank in January of 1995. Outstanding lease financings were $131.4 million, or 2.0% of the loan and lease portfolio at year-end 1995. There was no comparable figure at year-end 1994. For further information on the ICX acquisition - see Note 2 to the Consolidated Financial Statements. In addition, during 1995 the consumer loan portfolio grew by $111.1 million or 23.0% over 1994. Management has continued to pursue growth in the consumer loan portfolio due to the shorter-terms and higher yields. These loans help the Bank manage its interest rate sensitivity gap. The Bank's consumer loan portfolio is primarily secured by residential real estate properties. These increases in the consumer loan and lease portfolios were somewhat offset by decreases in the mortgage loan portfolio. The mortgage loan portfolio decreased by $136.6 million (including loans available for sale) from 1994 primarily as a result of the financial repositioning during the fourth quarter of 1995. The Bank securitized $331.4 million of fixed rate mortgage loans which were subsequently sold as part of the financial repositioning. The Bank originated $1.4 billion of mortgage loans in 1995 as compared to $1.3 billion in 1994. Overall loan originations were $1.8 billion in 1995, a 8.3% increase over the $1.7 billion of loan originations in 1994. 29 32 The following table summarizes the loan and lease activity for each of the past three years. LOAN AND LEASE ACTIVITY
Year Ended December 31, ------------------------------------ 1995 1994 1993 ---- ---- ---- (dollars in thousands) Originations: Real estate: Permanent: One-to-four family . . . . . . . . . . . . . . . . . . $ 1,077,838 1,023,016 1,826,387 Multifamily . . . . . . . . . . . . . . . . . . . . . . 29,093 47,430 27,271 Commercial . . . . . . . . . . . . . . . . . . . . . . 56,743 18,295 27,128 -------- --------- --------- Total permanent . . . . . . . . . . . . . . . . . . . 1,163,674 1,088,741 1,880,786 -------- --------- --------- Construction: One-to-four family . . . . . . . . . . . . . . . . . . 176,503 210,916 154,042 Multifamily . . . . . . . . . . . . . . . . . . . . . . 10,781 12,003 3,589 Commercial . . . . . . . . . . . . . . . . . . . . . . 22,922 8,293 7,844 -------- --------- --------- Total construction . . . . . . . . . . . . . . . . . 210,206 231,212 165,475 -------- --------- --------- Total real estate loans originated . . . . . . . . 1,373,880 1,319,953 2,046,261 Consumer line of credit draws . . . . . . . . . . . . . . . 146,293 130,132 105,235 Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . 161,635 142,033 29,805 Business line of credit draws . . . . . . . . . . . . . . . 37,980 76,071 52,533 Business . . . . . . . . . . . . . . . . . . . . . . . . . 21,290 15,048 14,895 Lease financings(1) . . . . . . . . . . . . . . . . . . . . 82,585 - - -------- --------- --------- Total loans and lease financings originated . . . . . 1,823,663 1,683,237 2,248,729 -------- --------- --------- Purchases(2): Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 600,480 Lease financings . . . . . . . . . . . . . . . . . . . . . 76,912 - - -------- --------- --------- Total purchases . . . . . . . . . . . . . . . . . . . 76,912 - 600,480 -------- --------- --------- Sales and principal reductions: Loans sold(3) . . . . . . . . . . . . . . . . . . . . . . . 473,488 177,521 351,216 Principal reductions . . . . . . . . . . . . . . . . . . . 1,338,707 1,479,437 2,186,241 -------- --------- --------- Total sales and principal reductions . . . . . . . . 1,812,195 1,656,958 2,537,457 -------- --------- --------- Increase before net items . . . . . . . . . . . . . $ 88,380 26,279 311,752 ======== ========= ========= - ---------------------- (1) Excludes $29.0 million in operating leases purchased in the acquisition of ICX Corporation in 1995, and $22.0 million in operating leases originated subsequent to the purchase. (2) Lease financing purchases include $76.9 million purchased in the acquisition of ICX Corporation. Included in 1993 are $579.8 million in loans acquired in the Women's Federal acquisition. (3) Includes $331.4 million, $28.7 million, and $309.8 million of loans swapped for mortgage-backed securities in the years ended December 31, 1995, 1994 and 1993, respectively.
30 33 The following table presents Charter One's nonperforming assets and the allowance for loan and lease losses at the past five year ends, indicating the downward trend in recent years. At December 31, 1995, the Bank had no outstanding commitments to lend additional funds to borrowers whose loans were on nonaccrual or restructured status. On January 1, 1995, Charter One adopted SFAS No. 114 "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which impose certain requirements on the measurement of impaired loans. The Company had previously measured such loans in accordance with the methods prescribed in SFAS No. 114 and the Company's method of recording cash receipts on impaired loans was essentially the same as prescribed by SFAS No. 118. Therefore, the comparability of the data presented in the tables below has not been effected by the adoption of SFAS No. 114 and SFAS No. 118. NONPERFORMING ASSETS
December 31, ----------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (dollars in thousands) Nonperforming loans and leases: Nonaccrual loans and leases: Real estate loans: One-to-four family . . . . . . . $ 15,145 18,272 24,314 22,128 24,041 Multifamily and commercial . . . 3,014 4,548 6,595 9,769 21,616 Construction and land . . . . . . 1,463 2,596 2,717 1,911 3,297 ------- ------- ------- ------- ------- Total real estate loans . . . . 19,622 25,416 33,626 33,808 48,954 Consumer . . . . . . . . . . . . . 1,525 1,085 1,550 1,585 3,717 Business . . . . . . . . . . . . . - 77 610 2,368 - Lease financings . . . . . . . . . 27 - - - - ------- ------- ------- ------- ------- Total nonaccrual loans and leases . . . . . . . . . . . 21,174 26,578 35,786 37,761 52,671 ------- ------- ------- ------- ------- Accruing loans and leases delinquent more than 90 days: Real estate loans: One to four family residential. . 2,002 2,781 1,228 3,317 3,459 Multifamily and commercial . . . 893 855 1,527 705 705 Construction and land . . . . . . - 207 101 208 - ------- ------- ------- ------- ------- Total real estate loans . . . 2,895 3,843 2,856 4,230 4,164 Consumer . . . . . . . . . . . . . 147 255 744 467 356 Business . . . . . . . . . . . . . - 17 222 372 - Lease financings . . . . . . . . . - - - - - ------- ------- ------- ------- ------- Total accruing 90-day delinquent loans and leases . . . . . . . . . . . 3,042 4,115 3,822 5,069 4,520 ------- ------- ------- ------- ------- Restructured real estate loans . . . 18,835 18,479 23,609 31,348 37,199 ------- ------- ------- ------- ------- Total nonperforming loans and leases . . . . . . . . . 43,051 49,172 63,217 74,178 94,390 Real estate acquired through foreclosure and other repossessed assets . . . . . . . . 11,650 15,379 31,053 33,604 32,451 ------- ------- ------- ------- ------- Total nonperforming assets . $ 54,701 64,551 94,270 107,782 126,841 ======= ======= ======= ======= ======= Ratio of: Nonperforming loans and leases to total loans and leases . . . . . . . .65% .75% .96% 1.19% 1.53% Nonperforming assets to total assets .40 .44 .65 .79 .92 Allowance for loan and lease losses Nonperforming loans and leases . . 149.67 131.86 102.37 79.51 53.58 Total loans and leases before allowance . . . . . . . . . . . . .96 .97 .98 .94 .82
Nonperforming assets at December 31, 1995 stood at $54.7 million, or .40% assets. That figure was down 15.3% from year-end 1994 primarily due to improvement in the levels of nonperforming real estate loans. Increased collection efforts, as well as an improving economy, caused the decrease in nonperforming real estate loans. This has also contributed to the improvements in the ratio of nonperforming loans and leases to total loans and leases. That ratio was .65%, .75% and .96% at December 31, 1995, 1994 and 1993, respectively. Nonperforming assets to total assets has had a similar trend ending at .40% of total assets at year-end 1995. 31 34 At December 31, 1995, there were $30.0 million of loans not reflected in the table above, where known information about possible credit problems of borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms and that may result in disclosure of such loans in the future. Included in the total is a $12.6 million loan on apartment buildings, a $7.7 million loan on a hotel property in Illinois and a $3.7 million loan on a downtown Cleveland office building. The current cash flow on the hotel property is sufficient to meet current debt service requirements. The office building is experiencing cash flow problems that may result in the Bank assuming control of the property in the near future. The apartment building has experienced past cash flow shortfalls, but the loan is current. Although loans may be classified as nonaccruing, many continue to pay interest on an irregular basis or at levels less than the contractual amounts due. A summary of income recorded on nonaccruing and restructured loans versus the potential income based upon full contractual yields for the past three years follows: SUMMARY OF INCOME ON NONACCRUING AND RESTRUCTURED LOANS
YEAR ENDED DECEMBER 31, --------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Income potential based on original contract . . . . . . . . . . . . . . . . $3,511 4,252 6,015 Actual income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950 3,401 4,441
ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES
Year Ended December 31, ------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Balance, beginning of year . . . . . . . . . . $ 64,838 64,715 58,982 50,577 36,804 Provision for loan and lease losses . . . . . . 1,032 2,948 7,549 12,544 14,260 Acquired through acquisition . . . . . . . . . - - 2,022 - 5,985 Other . . . . . . . . . . . . . . . . . . . . . 176 - - - - Loans and lease financings charged off: Mortgage . . . . . . . . . . . . . . . . . . (1,063) (1,094) (1,177) (600) (2,186) Consumer . . . . . . . . . . . . . . . . . . (1,193) (1,783) (2,413) (3,150) (3,572) Business . . . . . . . . . . . . . . . . . . (62) (343) (383) (1,480) (1,262) Lease financings . . . . . . . . . . . . . . - - - - - ----- ----- ------ ----- ----- Total charge-offs . . . . . . . . . . . . . (2,318) (3,220) (3,973) (5,230) (7,020) ----- ----- ------ ----- ----- Recoveries: Mortgage . . . . . . . . . . . . . . . . . . 615 200 55 919 395 Consumer . . . . . . . . . . . . . . . . . . 49 137 79 171 78 Business . . . . . . . . . . . . . . . . . . 44 58 1 1 75 Lease financings . . . . . . . . . . . . . . - - - - - ----- ----- ------ ----- ----- Total recoveries . . . . . . . . . . . . . 708 395 135 1,091 548 ----- ----- ------ ----- ----- Net loan and lease charge-offs . . . . . . (1,610) (2,825) (3,838) (4,139) (6,472) ----- ----- ------ ----- ----- Balance, end of year . . . . . . . . . . . . . $ 64,436 64,838 64,715 58,982 50,577 ====== ====== ======= ====== ====== Net charge-offs to average loans and leases . . . . . . . . . . . . . . . . . . .02% .04% .06% .07% .10% Net charge-offs to provision for loan and lease losses . . . . . . . . . . . . 156.01 95.83 50.84 33.00 45.39 ====== ===== ====== ===== =====
32 35 ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
December 31, ----------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Mortgage . . . . . . . . . . . . . . . . . . . $ 51,607 51,879 50,813 44,766 34,394 Consumer . . . . . . . . . . . . . . . . . . . 7,214 8,239 9,562 10,724 13,352 Business . . . . . . . . . . . . . . . . . . . 4,883 4,720 4,340 3,492 2,831 Lease financings . . . . . . . . . . . . . . . 732 - - - - ------ ------ ------ ------ ------ Total . . . . . . . . . . . . . . . . . . . $ 64,436 64,838 64,715 58,982 50,577 ====== ====== ====== ====== ====== Percent of loans and leases to total loans and leases Mortgage . . . . . . . . . . . . . . . . . . 88.3% 91.6% 93.2% 92.5% 91.9% Consumer . . . . . . . . . . . . . . . . . . 8.8 7.2 5.8 6.5 7.1 Business . . . . . . . . . . . . . . . . . . 0.9 1.2 1.0 1.0 1.0 Lease financings . . . . . . . . . . . . . . 2.0 - - - - ------ ------ ------ ------ ------ Total . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ======
Net loan and lease charge-offs remained low in 1995 at only .02% of average loan and lease balances. As can be seen in the above table, this compares favorably with recent history. The allowance for loan and lease losses as a percentage of ending loan and lease balances was .96%, .97% and .98% at December 31, 1995, 1994 and 1993, respectively. This level has remained fairly consistent, despite recent improvements in the levels of nonperforming loans. The allowance for loan and lease losses is maintained at levels believed adequate by management to absorb estimated future losses inherent in the loan and lease portfolio. Management believes that the allowance for loan and lease losses has been recorded in accordance with generally accepted accounting principles. Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses was adequate at December 31, 1995, future adjustments to the allowance may be necessary, and net income could be significantly affected, if circumstances and/or economic conditions differ substantially from the assumptions used in making the determinations about the levels of the loan and lease allowance. Any downturn in the Ohio and/or Michigan real estate markets could result in the Bank experiencing increased levels of nonperforming loans and charge-offs, significant provisions for loan and lease losses and significant reductions in income. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses. Such agencies may require the recognition of additions to the allowance based upon their judgements of information available to them at the time of their examination. SECURITIES The securities portfolio is comprised primarily of mortgage-backed securities, including government agency and AA and AAA rated private issues. At December 31, 1995 the aggregate carrying value and aggregate fair value of private issue mortgage-backed securities of a single issuer where the aggregate book value exceeds 10% of shareholders' equity is set forth in the table below.
DECEMBER 31, 1995 ------------------------ Carrying Fair Value Value -------- ------- (dollars in thousands) California Federal Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 324,016 321,155 Residential Funding Mortgage Securities I, Inc. . . . . . . . . . . . . . . . . . 213,000 213,299 The Prudential Home Mortgage Securities Company, Inc. . . . . . . . . . . . . . . 188,556 189,697 GE Capital Mortgage Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . 104,816 106,677
The investment policy of the Company provides that it purchase only mortgage-backed securities with investment ratings in the highest two ratings levels. Non-mortgage-backed securities are intended to help satisfy the Bank's legal liquidity requirements and help control interest rate risk. For further information concerning the composition of the securities portfolio, see Note 3 and 4 to the Consolidated Financial Statements. 33 36 DEPOSITS AND OTHER SOURCES OF FUNDS Deposits are generally the most important source of the Bank's funds for use in lending and general business purposes. Deposit inflows and outflows are significantly influenced by general interest rates and competitive factors. The Bank reprices its deposits weekly, or more often if required by competitive conditions. Consumer and commercial deposits are attracted principally within the Bank's primary market areas. The balance of deposits was $7.0 billion at December 31, 1995, a $76.7 million decline from year-end 1994. The primary reason for this decline was due to the FirstFed Merger. In an attempt to reposition FirstFed's deposit composition to a more retail oriented mix, $391.5 million of brokered deposits were allowed to run-off in 1995. Retail deposits actually increased $314.9 million, primarily in certificate of deposit accounts, as increased market interest rates brought consumers back to this investment choice. The deposits of savings associations such as Charter One Bank are presently insured by the Savings Association Insurance Fund ("SAIF"), which along with the Bank Insurance Fund ("BIF"), comprise the two insurance funds administered by the Federal Deposit Insurance Corporation ("FDIC"). Financial institutions which are members of the BIF have an insurance premium schedule which ranges from 0% to .27% (with a $2,000 minimum annual assessment) of insured deposits as compared to the current range of .23% to .31% of insured deposits for members of SAIF. Therefore, well capitalized and healthy BIF members pay a significantly lower premium than comparable SAIF insured institutions such as Charter One Bank. The disparity is due to the BIF having reached its statutory reserve ratio of 1.25% of insured deposits, while the SAIF is not anticipated to reach that statutory reserve level until 2002, absent a substantial increase in the premium rate or the imposition of special assessments or other significant developments, such as the merger of the SAIF and BIF. As a result of this disparity, SAIF members have been placed at a significant competitive disadvantage to BIF members with respect to pricing of loans and the deposits and the ability to achieve lower operating costs. A recapitalization plan being considered by the United States Congress provides for a special assessment of .80% to .90% of SAIF-insured deposits held as of March 31, 1995 and would be payable in 1996. If enacted as proposed, the Bank's special assessment would amount to approximately $60.5 million to $68.1 million, before taxes. Should this event occur, Charter One Bank would remain a well capitalized institution. No assurance can be given as to whether the proposed recapitalization plan will be implemented or as to the nature or the extent of any competitive disadvantage which may be experienced by SAIF-member institutions. Accordingly, this special assessment would result in a one-time charge that would significantly increase administrative expenses and adversely affect the results of operations. Conversely, depending upon the Bank's capital level and supervisory rating, and assuming, although no assurance can be given, that the premium levels for BIF and SAIF members are again equalized, deposit insurance premiums could decrease significantly, resulting in a decrease in administrative expenses in future periods. The U.S. House of Representatives and the U.S. Senate conferees on the banking portion of the overall budget reconciliation bill have agreed to a plan for the merger of the SAIF and BIF generally effective January 1, 1998. In connection with that agreement, identical bills have been introduced into the U.S. House of Representatives and the U.S. Senate that would eliminate the federal thrift charter and would require all thrift holding companies, such as Charter One Financial, Inc., to be regulated as bank holding companies. The proposed legislation would permit thrift holding companies to continue to engage in activities not permitted for bank holding companies if the thrift holding company meets certain conditions including not acquiring more than five percent of the shares or assets of any insured depository institution after September 13, 1995. Management believes this would not have a significant impact on future operations or results of operations for Charter One Bank. In addition to deposits, the Bank derives funds from different borrowing sources. The primary source of these borrowings is the Federal Home Loan Bank ("FHLB") system. Those borrowings were $3.2 billion at December 31, 1995 and $3.0 billion at December 31, 1994. The FHLB functions as a central bank providing credit for member financial institutions. As a member of the FHLB of Cincinnati, Charter One Bank is required to own capital stock in the FHLB and it is authorized to apply for advances on the security of such stock and certain home mortgages and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based upon either a fixed percentage of the Bank's assets or on the FHLB of Cincinnati's assessment of the Bank's creditworthiness. The FHLB of Cincinnati is required to review its credit limitations and standards at least once every six months. The FHLB of Cincinnati's current policy permits the Bank to obtain advances up to 25% of the 34 37 Bank's total assets. For further information as to the make-up, maturities and cost associated with these advances at December 31, 1995, see Note 10 to the Consolidated Financial Statements. In addition to FHLB advances, the Company uses reverse repurchase agreements to fund operations. Reverse repurchase agreements declined by $1.2 billion during 1995 as the financial repositioning to a more retail, as opposed to wholesale, funding mix was accomplished in the fourth quarter of 1995. For further information about the Bank's reverse repurchase agreement portfolio, see Note 11 to the Consolidated Financial Statements. The Company uses its portfolio of investment securities, loans and mortgage-backed securities as collateral for other borrowings. Other borrowings were $209.0 million at December 31, 1995, an increase of $50.2 million since December 31, 1994. For further information concerning these borrowings, see Note 12 to the Consolidated Financial Statements. LIQUIDITY The Bank's principal sources of funds are deposits, advances from the FHLB of Cincinnati, reverse repurchase agreements, repayments and maturities of loans and securities, proceeds from the sale of securities and funds provided by operations. While scheduled loan, security and interest-bearing deposit amortization and maturity are relatively predictable sources of funds, deposit flow and loan and mortgage-backed security repayments are greatly influenced by economic conditions, the general level of interest rates and competition. The Bank utilizes particular sources of funds based on comparative costs and availability. The Bank generally manages the pricing of its deposits to maintain a steady deposit balance, but from time to time management may decide not to pay rates on deposits as high as its competition and, when necessary, to supplement deposits with longer term and/or less expensive alternative sources of funds such as FHLB advances and reverse repurchase agreements. The Bank is required by regulation to maintain specific minimum levels of liquid investments. Regulations currently in effect require the Bank to maintain liquid assets at least equal to 5.0% of the sum of its average daily balance of net withdrawable accounts and borrowed funds due in one year or less. This regulatory requirement may be changed from time to time to reflect current economic conditions. The Bank has generally maintained liquidity substantially in excess of its required levels. The Bank's average regulatory liquidity ratio for the fourth quarter of 1995 was 7.04%. Liquidity management is both a daily and long-term responsibility of management. The Bank adjusts its investments in cash and cash equivalents based upon management's assessment of (i) expected loan demand, (ii) projected security maturities, (iii) expected deposit flows, (iv) yield available on interest-bearing deposits, and (v) the objectives of its asset/liability management program. Excess liquidity is generally invested in federal funds sold, interest-bearing deposits, U.S. Treasury and agency securities and floating rate corporate debt securities. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Cincinnati and collateral eligible for reverse repurchase agreements. Because the Bank has a stable retail deposit base, management believes that significant borrowings will not be necessary to maintain its current liquidity position. Management anticipates that the Bank will have sufficient funds available to meet current and future loan commitments. At December 31, 1995, the Bank and its subsidiaries had outstanding commitments to originate loans and leases of $250.0 million and unfunded lines of credit totaling $378.1 million (a significant portion of which normally remains undrawn). Certificates of deposit scheduled to mature in one year or less at December 31, 1995 totaled $3.2 billion. Management believes that a significant portion of the amounts maturing in 1996 will remain with the Bank because they are retail deposits. At December 31, 1995, the Bank had $1.1 billion of advances from the FHLB system and $848.0 million in reverse repurchase agreements which mature in 1996. Management intends to review the need for these borrowings when they mature and believes it has significant additional borrowing capacity with the FHLB and investment banking firms to meet any need for replacement borrowings. CAPITAL AND DIVIDENDS The Bank is subject to certain regulatory capital requirements. Management believes that as of December 31, 1995, the Bank meets all capital requirements to which it is subject. Refer to Note 16 to the Consolidated Financial Statements for an analysis of the Bank's regulatory capital. During 1994, the Board of Directors of the Company authorized management to purchase up to 1.2 million shares of the Company's common stock. Under the authorization, repurchases shall be made from time to time through open market purchases or unsolicited negotiated transactions. Shares purchased under this authorization will be held in 35 38 treasury and will be available for issuance upon the exercise of outstanding stock options. Under this authorization, by December 31, 1995, 766,100 shares of stock were repurchased for an aggregate price of $20.8 million. Most of those shares had been reissued in connection with the exercise of stock options and the acquisition of Accredited Computer Services. There were 101,488 shares held as treasury stock at December 31, 1995. In January of 1996, another 214,400 shares were repurchased for an aggregate price of $6.5 million under this authorization. A portion of these shares were also reissued in connection with the exercise of stock options. There were 194,678 shares held as treasury stock at January 31, 1996. The Company's common stock trades on the NASDAQ National Market System under the symbol COFI. As of February 28, 1996 there were approximately 7,400 shareholders of record. Quarterly stock prices and dividends declared are shown in the following table.
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------ ------ ------ ------ ---- 1995 High . . . . . . . . . . . . . . . . . . . . . $22.13 27.00 30.75 33.38 33.38 Low . . . . . . . . . . . . . . . . . . . . . . 18.88 20.00 24.38 28.13 18.88 Dividends declared and paid . . . . . . . . . . .17 .19 .19 .20 .75 1994 High . . . . . . . . . . . . . . . . . . . . . $20.25 23.37 24.00 21.00 24.00 Low . . . . . . . . . . . . . . . . . . . . . . 17.75 18.00 19.12 17.75 17.75 Dividends declared and paid . . . . . . . . . . .12 .15 .15 .17 .59
Cash dividend payout is continually reviewed by management and the Board of Directors. The Company intends to continue its policy of paying quarterly dividends; however, the payment will depend upon a number of factors, including capital requirements, regulatory limitations, the Company's financial condition, results of operations and the Bank's ability to pay dividends to the Company. At present, the Company has no significant source of income other than dividends from the Bank. Consequently the Company depends upon dividends from the Bank to accumulate earnings for payment of cash dividends to shareholders and for repurchases of its common stock as described above. See Note 15 to the Consolidated Financial Statements for a discussion of restrictions on the Bank's ability to pay dividends. IMPACT OF BUSINESS COMBINATIONS AND ASSET ACQUISITIONS As previously discussed, Charter One completed the FirstFed Merger on October 31, 1995. The merger was effected through the issuance of 1.2 shares of Company common stock for each share of FirstFed common stock resulting in the issuance of approximately 22.5 million shares of Company common stock. The merger has been accounted for as a pooling of interests and accordingly, the financial statements for the Company for all periods prior to the merger have been restated to include the results of FirstFed. FirstFed paid dividends of $.46 per share for the 10 months ending October 31, 1995. For the 12 months ended December 31, 1994 and 1993, FirstFed paid dividends per share of $.54 and $.47, respectively. All per share dividend amounts and share prices shown are those of the Company prior to the FirstFed Merger. For further information concerning this merger, see Note 2 to the Consolidated Financial Statements. While the FirstFed Merger was accounted for as a pooling of interests, periodically in the past the Company has completed other acquisitions where the purchase method of accounting was applied. When the purchase method is used to account for a business combination, the acquired assets and liabilities are stated at fair value as of the acquisition date. In the banking industry discounts and premiums are recorded to make fair value adjustments. These premiums and discounts are then amortized over the estimated lives of the related financial instruments. As shown below, net income for each period presented was affected due to amortization of valuation adjustments recorded in connection with the Company's acquisitions. 36 39 EFFECT OF PURCHASE ACCOUNTING ADJUSTMENTS ON INCOME
Year Ended December 31, ------------------------------------------------------- Net Other Federal Interest Loss Expense Income Net Income on Sale Net Taxes Income -------- ------- ------- ------- ------- (dollars in thousands) 1995 . . . . . . . . . . . . . . . . . . . . $ 3,168 432 601 739 1,396 1994 . . . . . . . . . . . . . . . . . . . . 4,814 3 466 1,521 2,824 1993 . . . . . . . . . . . . . . . . . . . . 9,984 2,933 247 2,338 4,466
The estimated effect in future years of amortization of valuation adjustments recorded in connection with the Company's acquisitions is set forth below: FORECASTED EFFECT OF PURCHASE ACCOUNTING ADJUSTMENTS ON INCOME
Year Ended December 31, ------------------------------------------------- Federal Net Other Income Interest Income Tax Net Incomes (Expense) (Benefit) Income ------- --------- --------- ------- (dollars in thousands) 1996 . . . . . . . . . . . . . . . . . . . . . . . . . $ 382 (611) (80) (149) 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 161 (640) (168) (311) 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 293 (620) (115) (212) 1999 . . . . . . . . . . . . . . . . . . . . . . . . . 234 (411) (62) (115) 2000 . . . . . . . . . . . . . . . . . . . . . . . . . 118 (410) (102) (190) Thereafter . . . . . . . . . . . . . . . . . . . . . . 5,129 2,406 2,638 4,897 ----- ----- ----- ----- Total . . . . . . . . . . . . . . . . . . . . . . . . $ 6,317 (286) 2,111 3,920 ===== ===== ===== =====
Amortization of valuation adjustments can be significantly affected by factors beyond the Company's control, such as changes in prepayment rates. The actual effect of these valuation adjustments may be materially different than the estimated effect disclosed herein. Unamortized balances of purchase accounting valuation amounts for all purchase business combinations and purchase of asset transactions are summarized below:
DECEMBER 31, --------------------- 1995 1994 ---- ---- (dollars in thousands) Net premium on interest-earning assets . . . . . . . . . . . . . . . . . . . . . $ (7,281) (8,679) Premiums on interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . 3,456 4,880 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 768
IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time because of inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. In the current interest rate environment, liquidity, maturity structure and quality of the Bank's assets and liabilities are critical to the maintenance of acceptable performance levels. 37 40 ACCOUNTING AND REPORTING DEVELOPMENTS A discussion of recently issued accounting pronouncements and their impact on the Company's consolidated financial statements is provided in Note 1 to the Consolidated Financial Statements. FOURTH QUARTER RESULTS The Company had a net loss in the final three months of 1995. As discussed earlier, there were pre-tax financial repositioning charges of $101.8 million and one-time merger-related expenses of $37.5 million in the fourth quarter of 1995 that caused this loss. Operating earnings were $34.2 million in the fourth quarter of 1995. These earnings exclude the financial repositioning charges and merger-related expenses. This was a $5.7 million, or 19.9% increase over net income of $28.5 million in the fourth quarter of 1994. This increase was primarily due to a $9.9 million, or 13.0% increase in net interest income. This increase in net interest income was primarily attributable to the yield on interest earning assets increasing to 7.75% for the three months ended December 31, 1995 as compared to 7.40% for the fourth quarter of 1994. This 35 basis point increase in the yield on assets caused interest income to increase and was driven by a higher level of market interest rates. The cost of interest-bearing liabilities decreased to 5.46% during the fourth quarter of 1995 as compared to 5.50% for the same period in 1994. The cost of the interest-bearing liabilities improved primarily due to interest rate exchange and cap agreements maturing and being terminated. Approximately $1.2 billion of interest rate exchange agreements matured during 1995 and another $750 million were terminated in the fourth quarter merger-related financial repositioning. Additionally, approximately $800 million of interest rate cap agreements were terminated in the fourth quarter financial repositioning. These agreements were matched with interest-bearing liabilities and had a negative effect on net interest income. Other income for the fourth quarter of 1995, excluding the financial repositioning losses of $101.8 million, was $13.4 million as compared to $8.6 million in the fourth quarter of 1994. This increase of $4.7 million was primarily attributable to income from leasing operations, increased service fees and other charges, as well as improved net gains on sales of assets. There was $2.5 million in income from leasing operations in the 1995 quarter and none in the 1994 quarter because the Bank commenced leasing operations with the acquisition of ICX Corporation in January of 1995. See Note 2 to the Consolidated Financial Statements for further information on this acquisition. The service fees and other charges increased by $799,000, or 12.3%, in the fourth quarter of 1995 as compared to the same period in 1994. This was primarily attributable to increases in checking account and ATM fees. This increase is due to pricing changes and increases in the number of checking accounts. Other expenses in the fourth quarter of 1995, excluding $37.5 million in merger-related expenses, were $46.4 million as compared to $43.0 million in the 1994 period. This $3.4 million, or 7.9% increase in other expenses was primarily attributable to a $2.5 million increase in compensation and employee benefits expenses. These expenses increased because the number of employees increased primarily due to the Bank acquiring ICX Corporation and Accredited Computer Services early in 1995. See Note 2 to the Consolidated Financial Statements for further information on these acquisitions. As a percentage of average assets, operating expenses (excluding the merger-related expenses) were 1.33% in the fourth quarter of 1995 as compared to 1.17% in the fourth quarter of 1994. The efficiency ratio (excluding merger-related expenses) was 47.14% in the fourth quarter of 1995 as compared to 50.40% for the same period in 1994. 38 41 The following table presents summarized quarterly data for each of the years indicated, restated to reflect the pooling of interests accounting treatment of the FirstFed Merger. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- (dollars in thousands, except per share data) 1995 Total interest income . . . . . . . . $ 273,372 275,535 276,782 261,721 1,087,410 Net interest income . . . . . . . . . 77,253 76,896 77,869 85,798 317,816 Provision for losses . . . . . . . . 258 258 258 258 1,032 Gains (losses) on loans and securities and other . . . . . . . . 2,095 3,022 3,263 (24,476) (16,096) Loss on termination of interest rate exchange agreements . . . . . . . . - - - (76,207) (76,207) Net income (loss) . . . . . . . . . 29,310 31,045 32,107 (58,430) 34,032 Primary earnings (loss) per share . . $.64 .68 .70 (1.30) .74 1994 Total interest income . . . . . . . . $ 248,990 240,803 253,390 262,997 1,006,180 Net interest income . . . . . . . . . 76,984 80,182 78,874 75,933 311,973 Provision for losses net income . . . 802 841 735 570 2,948 Gains (losses) on loans and securities and other . . . . . . . . 1,564 3,548 5,210 (744) 9,578 Loss on termination of interest rate exchange agreements . . . . . . . . (155,364) - - - (155,364) Earnings (loss) before extraordinary item . . . . . . . . . (79,065) 31,977 31,016 31,691 15,619 Extraordinary item . . . . . . . . . (9,147) - - (3,201) (12,348) Net income (loss) . . . . . . . . . (88,212) 31,977 31,016 28,490 3,271 Primary earnings (loss) per share: Before extraordinary item . . . . . $(1.74) .70 .68 .70 .34 Extraordinary item . . . . . . . . (.20) - - (.07) (.27) Net earnings (loss) . . . . . . . . $(1.94) .70 .68 .63 .07
The data for the fourth quarter of 1995 and first quarter of 1994 includes pre-tax losses of $101.8 million and $166.7 million, respectively, from charges related to financial repositioning and restructurings. The after-tax loss for these financial restructurings was $66.1 million in the fourth quarter of 1995 and $114.0 million in the first quarter of 1994. Also in the fourth quarter of 1995, the Company recorded merger expenses of $37.5 million with an after-tax impact of $26.5 million. 39 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, -------------------- 1995 1994 ---- ---- (dollars in thousands, except per share data) ASSETS Cash and deposits with banks Federal funds sold and other . . . . . . . . . . . . . . . . . . . . . . . $ 163,123 179,492 Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . 495,248 162,443 ------- ------- Investment securities available for sale . . . . . . . . . . . . . . . . . 658,371 341,935 Mortgage-backed securities: 407,427 467,247 Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,435,589 373,477 Held to maturity (fair value of $3,961,326 and $6,017,233) . . . . . . . 3,879,160 6,255,114 Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,340 5,422 Loans and leases, net (including allowance for loan and lease losses of $64,436 and $64,838) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,674,260 6,587,553 Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . 178,136 162,013 Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 96,581 101,510 Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . 73,683 78,303 Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,991 15,711 Equipment on operating leases . . . . . . . . . . . . . . . . . . . . . . . 32,755 - Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,602 - Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,964 133,895 --------- --------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,578,859 14,522,180 ========== ========== LIABILITIES Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,012,491 7,089,153 Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . 3,163,144 2,968,290 Reverse repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . 2,089,520 3,256,435 Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,020 158,870 Advance payments by borrowers for taxes and insurance . . . . . . . . . . . 47,738 55,102 Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . 56,955 90,894 Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . 155,593 79,765 ---------- ---------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 12,734,461 13,698,509 ---------- ---------- Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . SHAREHOLDERS' EQUITY Preferred stock - $.01 par value per share; 20,000,000 shares authorized and unissued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - Common stock - $.01 par value per share; 180,000,000 shares authorized; 45,119,014 and 45,035,837 shares issued . . . . . . . . . . . . . . . . . . 451 450 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 235,889 234,844 Retained earnings - substantially restricted . . . . . . . . . . . . . . . 642,197 647,730 Less 101,488 and 43,187 shares of common stock held in treasury, at cost . (3,061) (841) Net unrealized loss on securities, net of tax benefit of $15,978 and $30,647 (31,078) (58,512) ------- ------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 844,398 823,671 ------- ------- Total liabilities and shareholders' equity . . . . . . . . . . . . . $ 13,578,859 14,522,180 ========== ==========
See Notes to Consolidated Financial Statements. 40 43 CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands, except per share data) INTEREST INCOME: Loans and leases . . . . . . . . . . . . . . . . . . . $ 557,936 532,719 585,859 Mortgage-backed securities: Available for sale . . . . . . . . . . . . . . . . . 23,820 64,482 20,946 Held to maturity . . . . . . . . . . . . . . . . . . 418,344 364,306 423,345 Investment securities: Available for sale . . . . . . . . . . . . . . . . . 59,746 26,122 309 Held for investment . . . . . . . . . . . . . . . . . - - 33,233 Other interest-earning assets . . . . . . . . . . . . . 27,564 18,551 18,464 --------- --------- --------- Total interest income . . . . . . . . . . . . . . . 1,087,410 1,006,180 1,082,156 --------- --------- --------- INTEREST EXPENSE: Deposits . . . . . . . . . . . . . . . . . . . . . . . 346,605 305,494 363,854 FHLB advances . . . . . . . . . . . . . . . . . . . . . 177,704 150,744 142,088 Other borrowings . . . . . . . . . . . . . . . . . . . 245,285 237,969 268,820 --------- --------- --------- Total interest expense. . . . . . . . . . . . . . . 769,594 694,207 774,762 --------- --------- --------- Net interest income . . . . . . . . . . . . . . . . 317,816 311,973 307,394 Provision for loan and lease losses . . . . . . . . . . . 1,032 2,948 7,549 --------- --------- --------- Net interest income after provision for loan and lease losses . . . . . . . . . . . . . . 316,784 309,025 299,845 --------- --------- --------- OTHER INCOME (EXPENSE): Loan servicing fees . . . . . . . . . . . . . . . . . . 8,951 10,173 10,869 Service fees and other charges . . . . . . . . . . . . 26,633 24,404 20,686 Leasing operations . . . . . . . . . . . . . . . . . . 7,903 - - Net gains (losses): Loans . . . . . . . . . . . . . . . . . . . . . . . . 1,578 (1,925) 970 Mortgage-backed securities . . . . . . . . . . . . . (25,570) 4,191 8,286 Investment securities . . . . . . . . . . . . . . . . 6,010 6,955 467 Termination of interest rate exchange agreements . . (76,207) (155,364) - Other gains (losses) . . . . . . . . . . . . . . . . 1,886 357 (2,891) Other . . . . . . . . . . . . . . . . . . . . . . . . . 980 820 1,472 --------- --------- --------- Total other income (expense) . . . . . . . . . . . (47,836) (110,389) 39,859 --------- --------- --------- ADMINISTRATIVE EXPENSES: Compensation and employee benefits . . . . . . . . . . 89,141 83,660 81,860 Net occupancy and equipment . . . . . . . . . . . . . . 25,015 24,543 25,457 Federal deposit insurance premiums . . . . . . . . . . 17,445 17,503 16,224 State taxes . . . . . . . . . . . . . . . . . . . . . . 6,273 7,809 7,375 Merger expenses . . . . . . . . . . . . . . . . . . . . 37,528 - 3,300 Amortization of goodwill . . . . . . . . . . . . . . . 774 621 1,463 Other administrative expenses . . . . . . . . . . . . . 39,567 41,825 43,210 --------- --------- --------- Total administrative expenses . . . . . . . . . . . 215,743 175,961 178,889 --------- --------- --------- Income before federal income taxes and extraordinary item . . . . . . . . . . . . . . 53,205 22,675 160,815 Federal income taxes . . . . . . . . . . . . . . . . . . 19,173 7,056 56,415 --------- --------- --------- Income before extraordinary item . . . . . . . . . 34,032 15,619 104,400 Extraordinary item, net of tax benefit . . . . . . . . . - (12,348) - --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . $ 34,032 3,271 104,400 ========= ========= ========= Earnings per common and common equivalent share: Income before extraordinary item . . . . . . . . . . . $ .74 .34 2.29 Extraordinary item . . . . . . . . . . . . . . . . . . - (.27) - --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . $ .74 .07 2.29 ========= ========= =========
See Notes to Consolidated Financial Statements. 41 44 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total Additional Borrowings Net Unrealized Share- Common Paid-In Retained of Treasury Gain (Loss) holders' Stock Capital Earnings ESOP Stock on Securities Equity ------ --------- -------- ---------- -------- ------------- ------- (dollars in thousands, except per share data) Balance, January 1, 1993 $ 391 153,438 581,424 (1,402) - - 733,851 Common stock issued in connection with: Acquisition (Note 2) 33 55,165 - - - - 55,198 Stock options exercised . . . . . 3 1,986 - - - - 1,989 Repayments of borrowings of Employee Stock Ownership Plan . . . . - - - 1,402 - - 1,402 Conversion of subordinated into common stock . . 22 23,337 - - - - 23,359 Dividends paid ($.42 per share) . . . . . . - - (17,960) - - - (17,960) Net income . . . . . . - - 104,400 - - - 104,400 --- ------- ------- ------- ----- -------- ------- Balance, December 31, 1993 . . . . . . . . . . 449 233,926 667,864 902,239 Common stock issued in connection with stock options exercised . . 1 983 - - - - 984 Purchase of 48,000 of treasury stock . . - - - - (935) - (935) Treasury stock 4,813 common shares at cost, in connection stock options - (65) - - 94 - 29 Dividends paid ($.59 per share) . . . . . . - - (23,405) - - - (23,405) Net unrealized gain (loss) on securities available for sale, net of tax benefit . . . . - - - - - (58,512) (58,512) Net income . . . . . . - - 3,271 - - - 3,271 --- ------- ------- ------- ----- -------- ------- Balance, December 31, 1994 . . . . . . . . . . 450 234,844 647,730 (841) (58,512) 823,671
42 45
Total Additional Borrowings Net Unrealized Share- Common Paid-In Retained of Treasury Gain (Loss) holders' Stock Capital Earnings ESOP Stock on Securities Equity ------ --------- -------- ---------- -------- ------------- ------- (dollars in thousands, except per share data) Balance, December 31, 1994 . . . . . . . . . . 450 234,844 647,730 (841) (58,512) 823,671 Purchase of 718,100 shares of treasury stock - - - - (19,831) - (19,831) Treasury stock reissued in connection with stock options exercised 618,024 shares . . . . - - (9,596) - 16,796 - 7,200 Cash paid for fractional shares in connection with the FirstFed Merger, 990 shares . . - (26) - - - - (26) Treasury stock reissued in connection with the acquisition of ACS, 41,775 shares . . . . - - (7) - 815 - 808 Common stock issued in connection with stock options exercised, 84,086 shares . . . . 1 1,071 - - - - 1,072 Dividends paid ($.75 per share) . . . . . . - - (29,962) - - - (29,962) Change in net unrealized gain (loss) on securities net of tax benefit . . - - - - - 27,434 27,434 Net income . . . . . . - - 34,032 - - - 34,032 --- ------- ------- ------- ----- -------- ------- Balance, December 31, 1995 . . . . . . . . . . $ 451 235,889 642,197 - (3,061) (31,078) 844,398 === ======= ======= ======= ===== ======== =======
See Notes to Consolidated Financial Statements. 43 46 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . . $ 34,032 3,271 104,400 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan and lease losses . . . . . . . . . 1,032 2,948 7,549 Net (gains) losses . . . . . . . . . . . . . . . . . 16,096 (9,578) (6,832) Accretion of discounts, amortization of premiums, amortization of goodwill and depreciation, net . . . 26,360 6,684 7,778 Origination of real estate loans held for sale . . . (135,456) (137,561) (295,779) Proceeds from sale of loans held for sale . . . . . . 136,655 139,951 37,068 Purchases of investment securities held for sale . . - - (1,000) Proceeds from sale of investment securities held for sale - - 159,182 Proceeds from maturities of investment securities held for sale . . . . . . . . . . . . . . . . . . . - - 21,501 Purchase of mortgage-backed securities held for sale. - - (647,750) Proceeds from sale of mortgage-backed securities held for sale . . . . . . . . . . . . . . . . . . . - 62,008 199,446 Principal collected on mortgage-backed securities held for sale . . . . . . . . . . . . . . . . . . . - - 112,481 Loss on termination of interest rate exchange agreements 76,207 155,364 - Loss on extinguishment of debt. . . . . . . . . . . . - 18,708 - Other . . . . . . . . . . . . . . . . . . . . . . . . 10,220 (37,594) (20,528) --------- --------- --------- Net cash provided by (used in) operating activities 165,146 204,201 (322,484) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net principal (disbursed) repaid on loans and leases . (364,950) (66,765) 225,108 Proceeds from: Principal repayments and maturities of mortgage-backed securities held to maturity . . . . . . . . . . . . 673,991 1,179,950 2,359,212 Principal repayments and maturities of mortgage-backed securities available for sale . . . . . . . . . . . 32,717 192,112 - Principal repayment and maturities of investment securities held to maturity . . . . . . . . . . . . - 1,800 496,805 Principal repayment and maturities of investment securities available for sale . . . . . . . . . . . 864,903 159,849 - Sales of mortgage-backed securities held to maturity - 17,917 56,141 Sales of mortgage-backed securities available for sale 1,188,401 845,215 - Sales of investment securities available for sale . . 655,601 322,113 - Sales of FHLB stock . . . . . . . . . . . . . . . . . - 20,500 - Purchases of: Mortgage-backed securities held to maturity . . . . . (178,010) (1,501,023) (2,547,728) Mortgage-backed securities available for sale . . . . (3,081) (757,769) - Investment securities available for sale . . . . . . (1,443,905) (519,832) - Investment securities held for investment . . . . . . - - (250,249) Federal Home Loan Bank stock . . . . . . . . . . . . (11,255) (31,883) - Loans . . . . . . . . . . . . . . . . . . . . . . . . - - (20,698) Equipment on operating lease . . . . . . . . . . . . (22,011) - - Net decrease in other interest-bearing deposits, net of asset acquisitions . . . . . . . . . . . . . . - - 200 Net cash and cash equivalents (paid) received in connection with acquisitions . . . . . . . . . . . (9,857) 83,489 2,946 Other . . . . . . . . . . . . . . . . . . . . . . . . . (5,014) 21,466 11,405 --------- --------- --------- Net cash provided by (used in) investing activities . 1,377,530 (32,861) 333,142 --------- --------- ---------
44 47
Year Ended December 31, ---------------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings . . . (510,697) 212,864 (403,783) Proceeds from long-term borrowings . . . . . . . . . . 4,194,081 6,848,988 5,332,857 Repayments of long-term borrowings . . . . . . . . . . (4,713,866) (6,721,256) (4,406,205) Increase (decrease) in, net of acquisitions: Deposits . . . . . . . . . . . . . . . . . . . . . . (76,238) (277,434) (504,685) Advance payments by borrowers for taxes and insurance (7,364) 1,362 (7,288) Payment of dividends on common stock . . . . . . . . . (29,962) (23,405) (17,960) Proceeds from issuance of common stock . . . . . . . . 1,072 984 1,989 Purchase of treasury stock, net . . . . . . . . . . . . (12,629) (906) - Net payment to terminate interest rate exchange (70,637) (142,245) - ---------- ---------- ---------- Net cash used in financing activities . . . . . . . . . . (1,226,240) (101,048) (5,075) ---------- ---------- ---------- Net increase in cash and cash equivalents . . . . . . . . 316,436 70,292 5,583 Cash and cash equivalents, beginning of year. . . . . . . 341,935 271,643 266,060 ---------- ---------- ---------- Cash and cash equivalents, end of year. . . . . . . . . . $ 658,371 341,935 271,643 ========== ========== ==========
See Notes to Consolidated Financial Statements. 45 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of Charter One Financial, Inc., ("Charter One" or the "Company"), a unitary savings and loan holding company, and its wholly owned subsidiary, Charter One Bank, F.S.B. (the "Bank"), conform to generally accepted accounting principles and prevailing practices within the banking and thrift industry. A summary of the more significant accounting policies follows: NATURE OF OPERATIONS Charter One is a Delaware Corporation organized as a unitary savings and loan holding company and owns all of the outstanding capital stock of Charter One Bank, F.S.B. The business of the Bank, and, therefore, the Company, is providing consumer and business banking services to certain major markets in Ohio and, as of November 1995, in Michigan. At the end of 1995, the Bank was doing business through 155 full service banking branches and 9 loan production offices. Loans and deposits are primarily generated from the areas where banking branches are located. The Company's income is derived predominately from interest on loans, leases, and securities and, to a lesser extent, noninterest income. The Company's principal expenses are interest paid on deposits and borrowings, and normal operating costs. The Company's operations are principally in the savings industry, which constitutes a single industry segment. The Bank's subsidiaries engage principally in equipment leasing, data processing services, real estate appraisal, sales of tax deferred annuities, property and casualty insurance, and the development, operations and sale of real estate. Service corporations are not a significant part of the business of the Bank. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany transactions and balances have been eliminated. Investments in affiliates which are not majority owned are recorded on the equity basis. SECURITIES Securities consist of mortgage-backed securities, U.S. government and federal agency obligations, floating-rate notes, commercial paper, mutual funds and state and local government obligations. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," adopted as of January 1, 1994, securities are classified as trading, available for sale or held to maturity upon their acquisition. Securities classified as trading would be carried at estimated fair value with the unrealized holding gain or loss recorded in the statement of income. Securities classified as available for sale are carried at estimated fair value with the unrealized holding gain or loss reflected as a component of shareholders' equity. Securities classified as held to maturity are carried at amortized cost. Premiums and discounts are recognized in interest income over the period to maturity by the level yield method. Realized gains or losses on the sale of debt securities are recorded based on the amortized cost of the specific securities sold. Realized gains or losses on the sale of marketable equity securities are recorded based on the average cost. Security sales are recorded on a trade date basis. LOANS Loans intended for sale are carried at the lower of cost or estimated market value determined on an aggregate basis. Net unrealized losses are recognized through a valuation allowance by a charge to income. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances. For balance sheet presentation, the balances are presented net of deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. 46 49 Discounts and premiums are accreted or amortized using the interest method over the remaining period to contractual maturity adjusted for anticipated prepayments. Unamortized net fees are recognized upon early repayment of the loans. Unamortized net fees on loans sold are included in the basis of the loans in calculating gains and losses. On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which impose certain requirements on the measurement of impaired loans. The Company had previously measured such loans in accordance with the methods prescribed in SFAS No. 114. Consequently, no additional loss provisions were required by the adoption of these statements. SFAS No. 114 also requires that impaired loans for which foreclosure is probable should continue to be accounted for as loans. At the date of adoption, the balance of in-substance foreclosed loans reclassified to loans receivable was $1.2 million. The adoption of SFAS No. 114 and SFAS No. 118 did not have a material effect on the Company's results of operations. The Company's policy for recognition of interest on impaired loans including how cash receipts are recorded is essentially unchanged as a result of the adoption of SFAS Nos. 114 and 118. A loan (including a loan impaired under SFAS No. 114) is classified as nonaccrual when collectability is in doubt (this is generally when the borrower is 90 days past due on contractual principal or interest payments). A loan may be considered impaired, but remain on accrual status, when the borrower demonstrates (by continuing to make payments) a willingness to keep the loan current. When a loan is placed on nonaccrual status, unpaid interest is reversed and an allowance is established by a charge to interest income equal to all accrued interest. Income is subsequently recognized only to the extent that cash payments are received. Loans are returned to accrual status when, in management's judgment, the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original contractual terms). A loan is considered to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In general, the Bank considers a loan on income-producing properties to be impaired when the debt service ratio is less than 1.0 and principal recovery is in doubt. Loans on non-income producing properties are considered impaired whenever fair value is less than book value. The Bank performs a review of all loans over $500,000 to determine if the impairment criteria have been met. If the impairment criteria have been met, a reserve is calculated according to the provisions of the SFAS No. 114. For loans which are individually not significant ($500,000 or less) and represent a homogeneous population, the Bank evaluates impairment based on the level and extent of delinquencies in the portfolio and the Bank's prior charge-off experience with those delinquencies. Such loans include all mortgage loans secured by 1-4 family residential property, all consumer loans and certain multifamily real estate loans, non-residential real estate loans, business loans and leases. The Bank charges principal off at the earlier of (i) when a total loss of principal has been deemed to have occurred as a result of the book value exceeding the fair value or net realizable value or (ii) when collection efforts have ceased. LEASE ACCOUNTING The Company's lease transactions are classified as either sales-type, direct financing, or operating leases. The Company classifies leases at the inception of the lease in accordance with SFAS No. 13, "Accounting for Leases." Sales-type and direct financing leases are those leases that transfer substantially all of the costs and risks of ownership of the equipment to the lessee. Generally, the leases are classified as sales-type or direct financing leases if either (a) the lease term is at least 75 percent of the estimated economic life of the leased equipment or (b) the present value of the rental payments is at least 90 percent of the fair value of the leased equipment at the inception of the lease. Operating leases are those leases in which substantially all the benefits and risks of ownership of the equipment are retained by the lessor. Generally, the leases that do not meet conditions (a) or (b) described above are classified as operating leases. The estimated residual values are reviewed annually and reduced if necessary. Sales-Type Leases - At the inception of the lease, the present value of future rentals is recorded as equipment sales. Equipment cost less the present value of the residual is recorded as cost of equipment sold. Accordingly, a dealer profit is recognized at lease inception. The present values of future rentals and of the residual are recorded as net investment in sales-type leases. Unearned income is amortized to interest income over the lease term to produce a constant percentage return on the investment. 47 50 Direct Financing Leases - At lease inception, the present values of future rentals and of the residual are recorded as net investment in direct financing leases. Unearned interest income is amortized to interest income over the lease term to produce a constant percentage return on the investment. Operating Leases - Operating lease revenue includes monthly rentals. The cost of equipment is recorded as equipment on operating leases and is depreciated over the initial and succeeding lease terms, if any, to an estimated residual value. Initial Direct Costs - Sales commissions and other direct costs incurred in direct financing and operating leases are capitalized and recorded as part of the net investment in leases and of the equipment on operating leases and are amortized over the lease term. Syndication Fees - This income includes fees received from the sales of lease transactions originated by the Company and sold to institutional investors. In addition to these fees, the Company also may be entitled to a fee for the subsequent lease or sale of the equipment. Nonrecourse Financing - The Company assigns the rentals under many leases to financial institutions on a nonrecourse basis, for which the Company receives a cash payment equal to the discounted value of the lease rentals. In the event of a default by a lessee, the financial institution has a security interest in the underlying leased equipment but has no recourse against the Company. NONPERFORMING LOANS AND LEASES Loans and leases considered to be nonperforming include nonaccrual loans and leases, accruing loans and leases delinquent more than 90 days, and restructured loans. Loans and leases are classified as nonaccrual when, in management's judgment, the borrower no longer has the ability and intent to make periodic interest and principal payments. Loans and leases are classified as accruing loans or leases delinquent more than 90 days when the loan or lease is more than 90 days past due and, in management's judgment, the borrower has the ability and intent to make periodic interest and principal payments. Loans are classified as restructured when concessions are made to borrowers with respect to the principal balance, interest rate or the terms due to the inability of the borrower to meet the obligation under the original terms. ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses is established at a level believed adequate by management to absorb estimated losses inherent in the loan and lease portfolio. Management's determination of the adequacy of the allowance is based upon estimates derived from an analysis of individual credits, prior and current loss experience, loan and lease portfolio delinquency levels, overall growth in the loan and lease portfolio and current economic conditions. Consequently, these estimates are particularly susceptible to changes that could result in a material adjustment to results of operations. The provision for loan and lease losses represents a charge against current earnings in order to maintain the allowance for loan and lease losses at an appropriate level. Management believes that the allowance for loan and lease losses has been recorded in accordance with generally accepted accounting principles. PREMISES AND EQUIPMENT Premises and equipment and real estate held for investment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the useful lives of the related assets. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Interest rate exchange agreements ("swaps"), interest rate floor agreements ("floors"), interest rate collar agreements ("collars"), and interest rate cap agreements ("caps") used in asset/liability management activities (primarily as hedges against exposure to interest-rate risk associated with interest-bearing liabilities and not for speculation purposes) are accounted for using the accrual method. The net interest received or paid on swaps, floors, collars, and caps is recognized over the lives of the respective contracts as an adjustment to interest expense. Fees paid or received at inception of the agreements are amortized or accreted to interest expense over the lives of the related agreements. Gains and losses on terminated agreements are deferred and amortized to interest expense over the 48 51 remaining original term of the applicable agreement. If the assigned liability is eliminated, the gain or loss on the terminated agreement is recognized immediately. In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters of credit and commitments to purchase or sell assets. These financial instruments are recorded in the financial statements when they are funded or the related fees are incurred or received. REAL ESTATE OWNED Real estate owned, including property acquired in settlement of foreclosed loans, is carried at the lower of cost or estimated fair value less estimated cost to sell at the date of foreclosure. Costs relating to the development and improvement of real estate owned are capitalized, whereas costs relating to holding and maintaining the property are charged to expense. GOODWILL Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the date of acquisition and is being amortized using the straight-line method. LOAN FEES Loan origination fees received for loans, net of direct origination costs, are deferred and amortized to interest income over the contractual lives of the loans using the level yield method. Fees received for loan commitments that are expected to be drawn, based on the Bank's experience with similar commitments, are deferred and amortized over the lives of the loans using the level yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. Unamortized deferred loan fees related to loans paid off are included in income. Unamortized net fees on loans sold are included in the basis of the loans in calculating gains and losses. Amortization of net deferred fees is discontinued for loans that are deemed to be nonperforming. FEDERAL INCOME TAXES The Company and its wholly owned subsidiary file a consolidated income tax return. The provision for federal income taxes is based upon earnings reported for financial statement purposes rather than amounts reported on the Company's income tax returns. Deferred income taxes, which result from temporary differences in the recognition of income and expense for financial statement and tax return purposes, are included in the calculation of income tax expense. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, the Company considers all highly liquid investments with a term of three months or less to be cash equivalents. Cash flows from interest rate swaps are classified based on the on-balance-sheet assets or liabilities hedged. Federal Reserve Board regulations require depository institutions to maintain certain minimum reserve balances. These reserves, which consisted of vault cash and deposits at the Federal Reserve Bank, totaled $67.8 million and $63.4 million at December 31, 1995 and 1994, respectively. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement requires that long-lived assets and certain identified intangibles held and used by an entity, along with goodwill related to those assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss must be recognized if the estimate of the future cash flows (undiscounted and without interest charges) resulting from the use of the asset and its eventual disposition is less than the carrying amount of the asset. This statement is effective for fiscal years beginning after December 15, 1995 and will be applied prospectively. Management does not believe this statement, upon adoption, will have a material effect on the Company's financial condition or results of operations. 49 52 In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights". SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities", to require that a company recognize, as a separate asset, rights to service mortgage loans for others, however those servicing rights are acquired. A company that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with the servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based upon their relative values, if it is practicable to estimate those fair values. This statement also requires that a company periodically assess its capitalized mortgage servicing rights for impairment based upon the fair value of those rights. This statement is effective for fiscal years beginning after December 15, 1995 and will be applied prospectively. Management does not believe this statement, upon adoption, will have a material effect on the Company's financial condition or results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 applies to all transactions in which an entity acquires goods or services by issuing equity instruments or by incurring liabilities where the payment amounts are based upon the entity's common stock price, except for employee stock ownership plans. SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation arrangements with employees, rather than the intrinsic value based method that is contained in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS No. 123 does not require an entity to adopt the new fair value based method for purposes of preparing its basic financial statements. While the SFAS No. 123 fair value based method is considered by the FASB to be preferable to the APB 25 method, entities are allowed to continue to use the APB 25 method. Entities not adopting the fair value method under SFAS No. 123 are required to present pro forma net income and earnings per share, in the notes to the financial statements, as if the fair value based method had been adopted. The accounting requirements of SFAS No. 123 are effective for transactions entered into during fiscal years that begin after December 15, 1995. Management intends to continue to use the APB 25 method of accounting for stock-based compensation. RECLASSIFICATION Certain items in the consolidated financial statements for 1994 and 1993 have been reclassified to conform to the 1995 presentation. 2. BUSINESS COMBINATIONS, ASSET ACQUISITIONS AND DIVESTITURES On October 31, 1995, the Company completed a merger with FirstFed Michigan Corporation ("FirstFed"), the holding company for First Federal of Michigan, a federally chartered savings and loan association. The merger was effected through the issuance of 1.2 shares of Company common stock for each share of FirstFed common stock resulting in the issuance of 22,506,201 shares of Company common stock. The merger has been accounted for as a pooling of interests and, accordingly, the financial statements of the Company for all periods prior to the merger have been restated to include the results of FirstFed. FirstFed paid dividends of $8,612,000 for the 10 months ended October 31, 1995, $10,079,000 in 1994 and $8,687,000 in 1993. All per share dividend amounts are those of the Company prior to the merger. Total assets and shareholders' equity of FirstFed as of October 31, 1995 (unaudited) were $7,675,952,000 and $417,555,000, respectively. Total income and net income of the Company and FirstFed after restatement to conform the adoption dates of changes in accounting practices and reclassifications to conform presentation included in the 1995, 1994, and 1993 results of operations are as follows:
Total Income Net Income (Loss) ---------------------------------------- ----------------------------------------- January 1, 1995 Year Ended December 31, January 1, 1995 Year Ended December 31, to ----------------------- to ---------------------- October 31, 1995 1994 1993 October 31, 1995 1994 1993 ---------------- ------ ------ ---------------- ------ ------ (unaudited) (unaudited) (dollars in thousands) Company . . . . . . . $ 420,528 423,686 384,595 $ 54,684 67,613 61,436 FirstFed . . . . . . 448,022 472,105 737,420 (31,707) (64,342) 42,964 -------- ------- --------- ------- ------ ------- Total . . . . . . . $ 868,550 895,791 1,122,015 $ 22,977 3,271 104,400 ======== ======= ========= ======= ====== =======
50 53 A reconciliation of amounts previously reported by the Company and FirstFed to the amounts included in the restated statements of the Company for 1994 and 1993 follows:
Year Ended December 31, ----------------------------------------------- Total Income Net Income (Loss) ------------------ ------------------ 1994 1993 1994 1993 ---- ---- ---- ---- (dollars in thousands) As reported by the Company . . . . . . . . . . $ 423,686 384,595 $ 67,613 68,456 As reported by FirstFed . . . . . . . . . . . . 470,302 734,738 (96,290) 41,401 Adjustment to conform adoption dates of accounting changes . . . . . . . . . . . . . . - - 31,948 (5,457) Reclassifications to conform presentation . . . 1,803 2,682 - - --------- --------- -------- ------- Total, as restated . . . . . . . . . . . . . $ 895,791 1,122,015 $ 3,271 104,400 ========= ========= ======== =======
The adjustment to conform adoption dates of accounting changes shown in the table above is made to conform FirstFed's adoption date of an accelerated method of accounting for goodwill from January 1, 1994 to January 1, 1990 and to conform the Company's adoption date of SFAS No. 109, "Accounting for Income Taxes" from January 1, 1993 to January 1, 1992. In January 1995, the Company acquired a leasing company (ICX Corporation) and purchased a controlling interest in a computer service bureau (Accredited Computer Services) in which it previously had an equity investment. ICX Corporation had $135.8 million in assets, primarily financing leases and assets held under operating leases. Accredited Computer Services had $2.7 million in assets comprised primarily of computer equipment. The acquisition and operations of both companies are insignificant to the Company. During 1994, the Company sold three branches in South Carolina and eight branches in Virginia which had total deposits of $101 million. On January 21, 1993, the Company acquired Women's Federal Savings Bank, F.S.B. ("Women's Federal"), a federally chartered stock savings bank which operated through eleven full-service offices in the Cleveland, Ohio area. The merger was accounted for as a purchase under generally accepted accounting principles, whereby assets acquired and liabilities assumed were recorded at their estimated fair value as of the acquisition date. The acquisition was completed by exchanging shares of the Company's common stock valued at $55.2 million and $23.2 million in cash for all of the outstanding shares of Women's Federal. The Company acquired $794.9 million in assets, primarily loans and investment securities, and $739.7 million in liabilities, primarily deposits. Results of operations for Women's Federal have been included in the Company's consolidated statements of income since the acquisition date. 3. INVESTMENT SECURITIES Investment securities classified as available for sale at December 31, 1995, are summarized as follows:
December 31, 1995 ---------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ---------- ---------- --------- (dollars in thousands) U.S. Treasury and agency securities . . . . . . . $ 375,263 1,969 - 377,232 Corporate notes and commercial paper . . . . . . 27,584 2,449 - 30,033 Other . . . . . . . . . . . . . . . . . . . . . . 162 - - 162 ------- ----- ----- ------- Total . . . . . . . . . . . . . . . . . . . . . $ 403,009 4,418 - 407,427 ======= ===== ===== =======
51 54 Investment securities classified as available for sale at December 31, 1994, are summarized as follows:
December 31, 1994 ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- (dollars in thousands) U.S. Treasury and agency securities . . . . . . . . $ 423,224 12 7,059 416,177 Corporate notes and commercial paper . . . . . . . 50,036 1,243 391 50,888 Other . . . . . . . . . . . . . . . . . . . . . . . 183 - 1 182 -------- ----- ----- ------- Total . . . . . . . . . . . . . . . . . . . . . . $ 473,443 1,255 7,451 467,247 ======== ===== ===== =======
The weighted average interest rate on investment securities was 6.76% and 6.46% at December 31, 1995 and 1994, respectively. Investment securities available for sale by contractual maturity are shown below:
December 31, 1995 ----------------------------------------- Amortized Fair Average Cost Value Rate --------- ----- ------- (dollars in thousands) Due in one year or less . . . . . . . . . . . . . . . . . . . $ 208,720 212,471 6.94% Due after one year through two years . . . . . . . . . . . . 15,034 15,146 7.44 Due after two years through five years . . . . . . . . . . . 169,907 170,377 6.48 Due after five years through ten years . . . . . . . . . . . 539 557 6.10 Due after ten years . . . . . . . . . . . . . . . . . . . . . 8,809 8,876 6.89 ------- ------- ---- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 403,009 407,427 6.76% ====== ======= ====
At December 31, 1995 and 1994, total adjustable-rate investment securities were $8.9 million and $17.1 million, respectively. Charter One held no investment securities of any single nongovernmental issuer which were in excess of ten percent of shareholders' equity at either December 31, 1995 or 1994. Proceeds from sales of investment securities in 1995, 1994 and 1993 were $655.6 million, $322.1 million and $159.2 million, respectively. Gains on these sales were $6.0 million, $7.9 million and $477,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Losses were $1.0 million and $11,000 for the years ended December 31, 1994 and 1993, respectively. 52 55 4. MORTGAGE-BACKED SECURITIES The amortized cost, unrealized gains and losses of mortgage-backed securities and the fair values at December 31, 1995 were as follows:
December 31, 1995 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- (dollars in thousands) AVAILABLE FOR SALE Participation certificates: Government agency issues: FNMA . . . . . . . . . . . . . . . . . $ 329,317 196 2,366 327,147 FHLMC . . . . . . . . . . . . . . . . . 20,307 85 - 20,392 Private issues . . . . . . . . . . . . . 116 - - 116 Collateralized mortgage obligations: Government agency issues: FNMA . . . . . . . . . . . . . . . . . 262,206 4,413 25 266,594 FHLMC . . . . . . . . . . . . . . . . . 348,830 3,759 79 352,510 Private issues . . . . . . . . . . . . . 464,604 4,624 398 468,830 Total mortgage-backed securities --------- ------- ------ --------- available for sale . . . . . . . . . 1,425,380 13,077 2,868 1,435,589 HELD TO MATURITY --------- ------- ------- --------- Participation certificates: Government agency issues: FNMA . . . . . . . . . . . . . . . . . 1,546,206 27,541 1,570 1,572,177 FHLMC . . . . . . . . . . . . . . . . . 891,638 30,613 26 922,225 GNMA . . . . . . . . . . . . . . . . . 224,938 5,863 - 230,801 Private issues . . . . . . . . . . . . . 498,631 4,275 3,911 498,995 Collateralized mortgage obligations: Government agency issues: FNMA . . . . . . . . . . . . . . . . . 180,013 9,108 3 189,118 FHLMC . . . . . . . . . . . . . . . . . 83,708 5,147 106 88,749 Private issues . . . . . . . . . . . . . 454,026 6,808 1,573 459,261 --------- ------- ------ --------- Total mortgage-backed securities held to maturity . . . . . . . . . . 3,879,160 89,355 7,189 3,961,326 --------- ------- ------ --------- Total . . . . . . . . . . . . . . . $ 5,304,540 102,432 10,057 5,396,915 ========= ======= ====== =========
53 56 At December 31, 1994, the amortized cost, unrealized gains and losses of mortgage-backed securities and the fair values were as follows:
December 31, 1994 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ (dollars in thousands) AVAILABLE FOR SALE Participation certificates: Government agency issues: FNMA . . . . . . . . . . . . . . . . . $ 16,354 263 606 16,011 FHLMC . . . . . . . . . . . . . . . . . 180,862 361 12,436 168,787 GNMA . . . . . . . . . . . . . . . . . 13,525 - 1,594 11,931 Private issues . . . . . . . . . . . . . 163 - - 163 Collateralized mortgage obligations: Government agency issues: FNMA . . . . . . . . . . . . . . . . . 13,836 - 1,246 12,590 FHLMC . . . . . . . . . . . . . . . . . 9,227 - 653 8,574 Private issues . . . . . . . . . . . . . 111,973 - 13,790 98,183 Mutual funds . . . . . . . . . . . . . . . 60,891 - 3,653 57,238 ---------- ------ ------- --------- Total mortgage-backed securities available for sale . . . . . . . . . . 406,831 624 33,978 373,477 ---------- ------ ------- --------- HELD TO MATURITY Participation certificates: Government agency issues: FNMA . . . . . . . . . . . . . . . . . 2,778,305 2,201 184,040 2,596,466 FHLMC . . . . . . . . . . . . . . . . . 1,083,868 4,004 20,639 1,067,233 GNMA . . . . . . . . . . . . . . . . . 225,962 462 6,724 219,700 Private issues . . . . . . . . . . . . . 570,319 1,964 4,962 567,321 Collateralized mortgage obligations: Government agency issues: FNMA . . . . . . . . . . . . . . . . . 423,525 399 8,071 415,853 FHLMC . . . . . . . . . . . . . . . . . 406,711 34 8,482 398,263 Private issues . . . . . . . . . . . . . 766,424 3,586 17,613 752,397 ---------- ------ ------- --------- Total mortgage-backed securities held to maturity . . . . . . . . . . . 6,255,114 12,650 250,531 6,017,233 ---------- ------ ------- --------- Total . . . . . . . . . . . . . . . . $ 6,661,945 13,274 284,509 6,390,710 ========== ====== ======= =========
On November 15, 1995, the FASB staff issued a special report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities". In accordance with provisions in that special report, management chose to reclassify certain securities from the available for sale portfolio to the held to maturity portfolio. At December 31, 1995, the date of the transfer, the fair value of those securities was $77.3 million and the unrealized loss on those securities was $2.3 million. Such loss will be amortized through equity over the remaining life of the securities. Additionally, in accordance with implementation of the same special report, management chose to reclassify certain securities that were classified as held to maturity to the available for sale portfolio. At December 31, 1995, the date of the transfer, the amortized cost of those securities was $1.1 billion and the unrealized gain on those securities was $12.3 million. In 1994, certain of those securities had been transferred from available for sale to held to maturity with an unrealized loss of $50.2 million. At December 31, 1995, it was management's intent to reclassify these same securities back to the held to maturity portfolio after a sufficient period of market value risk. On January 31, 1996, such a reclassification was made and an after-tax increase of $42.2 million in shareholder's equity was recorded. During the fourth quarter of 1995, management also chose to reclassify $945.7 million of fixed, low-rate mortgage-backed securities from held to maturity to available for sale. This transfer was made as a component of the FirstFed Merger repositioning in order to maintain the Company's existing interest rate risk position. The mortgage-backed securities were sold and a loss on the sale of $17.5 million was recorded in the fourth quarter of 1995. 54 57 During 1994, mortgage-backed securities held to maturity with an aggregate amortized cost of $17.9 million were sold and $17.4 million were transferred to available for sale. The securities represent the entire portfolio of securities held by the Bank which were issued by the Resolution Trust Corporation ("RTC") and were collateralized mortgage obligations backed by first mortgage loans on multifamily properties. Certain of these securities had decreasing levels of credit support due to increasing collateral delinquencies and/or declining loss reserve funds. As a result of the increased credit risk resulting from the significant deterioration in the quality of the loans collateralizing these securities, management sold and/or reclassified its entire portfolio of RTC multifamily securities. The majority of the securities sold were subsequently formally downgraded by ratings agencies. During 1994, mortgage-backed securities with an amortized cost basis of $1,082.9 million and a fair value of $1,032.7 million were transferred from the available for sale portfolio to the held to maturity portfolio. These securities were acquired to provide the Bank with a positive spread over the cost of funding and were initially included in the available for sale portfolio to provide flexibility for asset/liability management purposes. The securities continue to provide net interest income at management's targeted spread over the cost of funding. Management, after considering market conditions as well as its asset/liability management position, determined that it will hold these securities to maturity. The net unrealized loss as of the date of transfer was recorded as a component of amortized cost of the securities, while the tax-adjusted net unrealized loss was reported in shareholders' equity. These amounts were being amortized over the estimated remaining life of the securities using the interest method. Of the $58.5 million in tax-adjusted net unrealized losses recorded in equity as of December 31, 1994, $32.7 million represented the tax-adjusted net unrealized holding loss on available for sale securities transferred to the held to maturity portfolio. Sales of mortgage-backed securities available for sale resulted in gains of $1.8 million in 1995, $10.1 million in 1994 and $8.5 million in 1993. Losses, including write-downs to fair value, were $27.4 million in 1995, $5.9 million in 1994 and $225,000 in 1993. A commitment to sell $327.1 million of Federal National Mortgage Association mortgage-backed securities was entered into with a trade date of December 21, 1995 and a settlement date of January 18, 1996. The loss on the sale of $2.2 million was recorded at the trade date. 55 58 Mortgage-backed securities are classified by type of interest payment as follows:
December 31, ------------------------------------------------------------------------------ 1995 1994 ------------------------------------- ----------------------------------- Amortized Fair Average Amortized Fair Average Cost Value Rate Cost Value Rate ----------- ----- ----------- ----------- ----- ---------- (dollars in thousands) AVAILABLE FOR SALE Adjustable rate: Participation certificates . . . $ 1,889 1,862 6.14% Collateralized mortgage obligations $ 1,072,890 1,085,208 7.23% 21,784 19,570 6.36 Mutual funds . . . - - - 60,891 57,238 5.57 --------- --------- ---- ---------- --------- ---- Total adjustable rate 1,072,890 1,085,208 7.23 84,564 78,670 5.79 --------- --------- ---- ---------- --------- ---- Fixed rate: Participation certificates . . . 349,740 347,655 6.23 209,015 195,030 7.16 Collateralized mortgage obligations 2,750 2,726 5.30 113,252 99,777 6.57 --------- --------- ---- ---------- --------- ---- Total fixed rate 352,490 350,381 6.22 322,267 294,807 6.95 --------- --------- ---- ---------- --------- ---- Total available for sale . . 1,425,380 1,435,589 6.98 406,831 373,477 6.71 --------- --------- ---- ---------- --------- ---- HELD TO MATURITY Adjustable rate: Participation certificates . . . 1,279,124 1,297,319 7.08 1,459,067 1,441,393 6.27 Collateralized mortgage obligations 357,816 372,972 7.48 1,389,954 1,370,535 7.57 --------- --------- ---- ---------- --------- ---- Total adjustable rate 1,636,940 1,670,291 7.17 2,849,021 2,811,928 6.90 --------- --------- ---- ---------- --------- ---- Fixed rate: Participation certificates . . . 1,882,289 1,926,879 7.56 3,199,387 3,009,326 7.15 Collateralized mortgage obligations 359,931 364,156 7.32 206,706 195,979 7.49 --------- --------- ---- ---------- --------- ---- Total fixed rate 2,242,220 2,291,035 7.52 3,406,093 3,205,305 7.17 --------- --------- ---- ---------- --------- ---- Total held to maturity . . 3,879,160 3,961,326 7.37 6,255,114 6,017,233 7.05 --------- --------- ---- ---------- --------- ---- Total mortgage-backed securities . . . . . . $ 5,304,540 5,396,915 7.27% $ 6,661,945 6,390,710 7.03% ========= ========= ==== ========== ========= ====
56 59 Adjustable-rate mortgage-backed securities are further classified by type of repricing index as follows:
1995 ------------------------------------- Amortized Fair Average Cost Value Rate ----------- ----- ---------- (dollars in thousands) Available for sale: Collateralized mortgage obligations: One-month LIBOR . . . . . . . . . . . . . . . . . . . . . $ 1,025,471 1,037,585 7.22% Other . . . . . . . . . . . . . . . . . . . . . . . . . . 47,419 47,623 7.39 --------- --------- ---- Total adjustable rate available for sale . . . . . . . . 1,072,890 1,085,208 7.23 --------- --------- ---- Held to maturity: Participation certificates: One year treasury bills . . . . . . . . . . . . . . . . . 525,800 539,741 7.42 FHLB 11th District cost of funds . . . . . . . . . . . . 509,574 505,568 6.70 One-year constant maturity treasury . . . . . . . . . . . 211,000 219,868 7.04 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 32,750 32,144 7.67 Collateralized mortgage obligations: One-month LIBOR . . . . . . . . . . . . . . . . . . . . . 333,994 349,113 7.46 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 23,822 23,857 7.75 --------- --------- ---- Total adjustable rate held to maturity . . . . . . . . 1,636,940 1,670,291 7.17 --------- --------- ---- Total adjustable rate . . . . . . . . . . . . . . . . $ 2,709,830 2,755,499 7.19% ========= ========= ====
5. LOANS AND LEASES Loans and leases held for investment consist of the following:
DECEMBER 31, ----------------------- 1995 1994 ---- ---- (dollars in thousands) Real estate: Permanent: One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,140,857 5,266,481 Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359,056 394,676 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,372 351,892 Construction: One-to-four family. . . . . . . . . . . . . . . . . . . . . . . . . . 132,776 133,081 Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,495 7,645 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,592 32,863 --------- --------- Total real estate . . . . . . . . . . . . . . . . . . . . . . . . . 6,051,148 6,186,638 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 594,609 483,531 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,747 84,307 Lease financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,352 - --------- --------- Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . 6,842,856 6,754,476 --------- --------- Less: Loans in process . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,845 70,369 Unamortized net discount . . . . . . . . . . . . . . . . . . . . . . . 4,150 5,870 Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . 64,436 64,838 Deferred loan fees, net . . . . . . . . . . . . . . . . . . . . . . . . 16,165 25,846 --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,596 166,923 --------- --------- Loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . $ 6,674,260 6,587,553 ========= =========
Loans with adjustable rates included above totaled $2.3 billion and $2.2 billion at December 31, 1995 and 1994, respectively. Substantially all such loans have contractual interest rates that increase or decrease at periodic intervals no greater than three years, or have original terms to maturity of three years or less. Adjustable-rate loans reprice primarily based upon U.S. treasury security rates. 57 60 The Bank's primary lending areas are within the states of Ohio and Michigan. At December 31, 1995 and 1994, $6.3 billion and $6.2 billion, respectively, of the Bank's gross loans were to borrowers located within these two states. Although the Bank has a diversified loan portfolio, its borrowers' ability to honor their contracts is substantially dependent upon general economic conditions of the region. The Bank originates or purchases commercial real estate and business loans. These loans are considered by management to be of somewhat greater risk of uncollectibility than single-family residential real estate loans due to the dependency on income production or future development of real estate. The following table sets forth the Bank's commercial real estate and commercial construction loan portfolios by type of collateral.
December 31, --------------------------------------------------------- 1995 1994 ----------------------- ----------------------- Percent Percent of of Amount Total Amount Total ------ ------- ------ ------- (dollars in thousands) Strip shopping centers . . . . . . . . . . . . $ 139,905 34.4% $ 142,345 37.0% Office buildings . . . . . . . . . . . . . . . 63,573 15.6 69,834 18.2 Warehouses . . . . . . . . . . . . . . . . . . 57,800 14.2 51,593 13.4 Developed and undeveloped land . . . . . . . . 57,290 14.1 23,883 6.2 Hotel property . . . . . . . . . . . . . . . . 36,939 9.1 41,120 10.7 Mobile home parks . . . . . . . . . . . . . . . 18,630 4.6 20,892 5.4 Other . . . . . . . . . . . . . . . . . . . . . 32,827 8.0 35,088 9.1 -------- ----- -------- ----- Total . . . . . . . . . . . . . . . . . . . . $ 406,964 100.0% $ 384,755 100.0% ======== ===== ======== =====
Business loans include loans to companies located in Ohio and Michigan totaling $64 million and $82 million at December 31, 1995 and 1994, respectively. Business loans are collateralized by accounts receivable, inventory and other assets used in the borrowers' business. Substantially all of the consumer loans, including consumer lines of credit, are secured by equity in the borrowers' residence. At December 31, 1995, 1994 and 1993, loans serviced for the benefit of others, not included in the detail above, totaled $1.2 billion, $883 million and $960 million, respectively. Included in these totals were loans sold on a recourse basis of $23 million, $29 million and $35 million, respectively. Totals exclude loans serviced for the Federal Home Loan Mortgage Corporation of $50 million, $66 million and $137 million, respectively, which were exchanged for mortgage-backed securities held by the Company. Custodial escrow balances maintained in connection with the foregoing loan servicing were $19 million and $25 million at December 31, 1995 and 1994, respectively. The Company normally has outstanding a number of commitments to extend credit. At December 31, 1995, there were outstanding commitments to originate $206 million of fixed-rate mortgage and other loans and leases and $44 million of adjustable-rate loans, all at market rates. Terms of the commitments extend up to nine months, but are generally less than two months. At December 31, 1995, there were also outs4anding unfunded consumer lines of credit of $355 million and business lines of credit of $23 million. The Company does not expect all of these lines to be used by the borrowers. A summary of the investment in lease financings is as follows:
December 31, 1995 ---------------------- (dollars in thousands) Direct financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,713 Sales type leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,639 -------- Total lease financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 131,352 ========
58 61 The components of the investment in lease financings are as follows:
December 31, 1995 ---------------------- (dollars in thousands) Total future minimum lease rentals . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125,773 Estimated residual value of leased equipment . . . . . . . . . . . . . . . . . . . . . 32,451 Initial direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987 Less unearned income on minimum lease rentals and estimated residual value of leased equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,859) -------- Total lease financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 131,352 ========
At December 31, 1995, future minimum lease rentals on sales-type and direct financing leases are as follows: $39.6 million in 1996; $32.3 million in 1997; $24.4 million in 1998; $15.7 million in 1999; $7.8 million in 2000, and $5.9 million thereafter. At December 31, 1995, future minimum lease rentals on noncancelable operating leases are as follows: $16.8 million in 1996; $8.7 million in 1997; $549,000 in 1998, and $3,000 in 1999. ALLOWANCE FOR LOAN AND LEASE LOSSES Changes in the allowance for loan and lease losses are as follows:
Year Ended December 31, ------------------------------------ 1995 1994 1993 ---- ---- ---- (dollars in thousands) Balance, beginning of year . . . . . . . . . . . . . . . . . $ 64,838 64,715 58,982 Provision . . . . . . . . . . . . . . . . . . . . . . . . . 1,032 2,948 7,549 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 176 - - Amounts charged off . . . . . . . . . . . . . . . . . . . . (2,318) (3,220) (3,973) Recoveries . . . . . . . . . . . . . . . . . . . . . . . . 708 395 135 Acquired through acquisition . . . . . . . . . . . . . . . - - 2,022 ------- ------- ------- Balance, end of year . . . . . . . . . . . . . . . . . . . . $ 64,436 64,838 64,715 ======= ======= =======
Nonperforming loans and leases were $43.1 million, $49.2 million and $63.2 million at December 31, 1995, 1994 and 1993, respectively. As of December 31, 1995, the total investment in impaired loans was $1.7 million. The entire $1.7 million was subject to allowances for credit losses which stood at $1.0 million as of December 31, 1995. The average recorded investment in impaired loans during 1995 was $1.7 million, and interest income recognized in 1995 was $114,000. The interest income potential based upon the original terms of the contracts for these impaired loans was $160,000 for 1995. 6. PREMISES AND EQUIPMENT Premises and equipment consists of the following:
December 31, ---------------------- 1995 1994 ---- ---- (dollars in thousands) Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . $ 17,546 17,438 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . 121,065 117,782 Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . 71,638 63,542 --------- -------- 210,249 198,762 Accumulated depreciation and amortization . . . . . . . . . . . . . . . . (113,668) (97,252) --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,581 101,510 ========= ========
59 62 7. REAL ESTATE OWNED Real estate owned consists of the following:
December 31, --------------------- 1995 1994 ---- ---- (dollars in thousands) Acquired in settlement of loans . . . . . . . . . . . . . . . . . . . . . . $ 11,650 14,184 In-substance foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . - 1,196 Held for investment and acquired for development . . . . . . . . . . . . . 341 331 ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,991 15,711 ======= =======
8. ACCRUED INTEREST RECEIVABLE Accrued interest receivable consists of the following:
December 31, -------------------- 1995 1994 ---- ---- (dollars in thousands) Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,638 36,745 Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . 26,863 33,386 Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,110 8,104 Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . 72 68 ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,683 78,303 ======= =======
9. DEPOSITS Deposits consist of the following:
December 31, ------------------------------------------------------- 1995 1994 ---------------------- ----------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------ -------- ------ -------- (dollars in thousands) Checking accounts: Interest-bearing . . . . . . . . . . . . . $ 513,933 1.98% $ 506,601 2.06% Noninterest-bearing . . . . . . . . . . . . 220,029 - 184,906 - Savings accounts . . . . . . . . . . . . . . 1,007,178 2.41 1,140,023 2.42 Money market accounts . . . . . . . . . . . . 829,087 3.19 928,858 3.14 Certificates of deposit . . . . . . . . . . . 4,438,831 5.97 4,323,928 5.27 ---------- ---- ---------- ---- Deposits . . . . . . . . . . . . . . . . 7,009,058 4.65 7,084,316 4.16 Plus unamortized premium on deposits purchased . . . . . . . . . . . . . 3,433 4,837 ---------- ---------- Deposits, net . . . . . . . . . . . . . . $ 7,012,491 $ 7,089,153 Including the annualized effect of applicable ========== ========== swaps, floors, and amortization of deferred gains on terminated swaps . . . . . . . . . 4.61% 4.57% ==== ====
60 63 A summary of certificates of deposit by maturity follows:
December 31, 1995 ---------------------- (dollars in thousands) Within 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,177,112 12 months to 24 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622,521 24 months to 36 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230,986 36 months to 48 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,103 Over 48 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,109 ----------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,438,831 ===========
At December 31, 1995, brokered certificates of deposit represent .41% of the total certificates of deposit. 10. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank ("FHLB") advances at December 31, 1995, are secured by Charter One's investment in the stock of the Federal Home Loan Bank, as well as certain real estate loans aggregating $4.2 billion and mortgage-backed securities aggregating $231 million. FHLB advances are composed of the following:
December 31, -------------------------------------------------------- 1995 1994 ------------------------- ---------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------ -------- ------ -------- (dollars in thousands) Fixed-rate advances . . . . . . . . . . . . . . $ 1,310,122 5.78% $1,041,747 6.09% Variable-rate advances . . . . . . . . . . . . 1,853,000 5.87 1,926,500 6.02 ---------- ---- --------- ---- Advances . . . . . . . . . . . . . . . . . . 3,163,122 5.84 2,968,247 6.04 Unamortized premium . . . . . . . . . . . . . . 22 43 ---------- --------- Advances, net . . . . . . . . . . . . . . . . $ 3,163,144 $2,968,290 Including the annualized effect of applicable ========== ========= swaps, caps and amortization of deferred gains on terminated swaps . . . . . . . . . . 5.90% 6.10% ==== ====
The variable-rate advances reprice based upon LIBOR at one- to six-month intervals, and included $171 million with a 6.00% LIBOR cap, and $573 million which are callable, at par, by the FHLB. Charter One has also entered into stand-alone interest rate cap agreements applicable to certain variable-rate and short-term fixed-rate FHLB advances. Reference is made to Note 13, "Interest Rate Risk Management," for additional discussion. 61 64 FHLB advances mature as follows:
December 31, 1995 -------------------------------------------------- Fixed-Rate Advances Variable-Rate Advances ------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------ ------- ------ -------- (dollars in thousands) Maturing in: 1996 . . . . . . . . . . . . . . . . . . . . $ 372,500 5.24% $ 730,000 5.89% 1997 . . . . . . . . . . . . . . . . . . . . 387,300 5.95 928,000 5.86 1998 . . . . . . . . . . . . . . . . . . . . 160,000 6.60 125,000 5.87 1999 . . . . . . . . . . . . . . . . . . . . 150,000 6.08 70,000 5.91 2000 . . . . . . . . . . . . . . . . . . . . 200,000 5.58 - - 2005 . . . . . . . . . . . . . . . . . . . . 5,000 6.52 - - 2006 . . . . . . . . . . . . . . . . . . . . 352 3.98 - - 2007 . . . . . . . . . . . . . . . . . . . . 33,867 5.82 - - 2009 . . . . . . . . . . . . . . . . . . . . 567 5.00 - - 2010 . . . . . . . . . . . . . . . . . . . . 536 1.00 - - --------- ---- --------- ---- Total . . . . . . . . . . . . . . . . . . . 1,310,122 5.78% 1,853,000 5.87% Unamortized premium . . . . . . . . . . . . . 22 ==== - ==== ---------- --------- Total FHLB advances, net . . . . . . . . . $ 1,310,144 $1,853,000 ========== =========
Certain advances require periodic amortization of principal. At December 31, 1995, scheduled repayments of advances are as follows: $1,104,600,000 in 1996, $1,317,520,000 in 1997, $287,347,000 in 1998, $222,481,000 in 1999, $202,624,000 in 2000, and $28,550,000 thereafter. 62 65 11. REVERSE REPURCHASE AGREEMENTS Securities sold under agreements to repurchase are composed of the following:
December 31, -------------------- 1995 1994 ---- ---- (dollars in thousands) Short term: Mortgage-backed securities of $822 million, with fair value approximating $844 million, sold with agreements to repurchase the same securities. The agreements have a weighted average interest rate of 5.86% and mature in 1996 (1994-$2.2 billion sold, with fair value of $2.1 billion, interest at 5.57% due in 1995) . . . . . . . . . . . . . . . . . . . . $ 798,783 2,073,120 U.S. Treasury securities of $50 million, with fair value approximating $50 million, sold with agreements to repurchase the same securities. The agreements have a weighted average interest rate of 5.82% and mature in 1996 (1994-$250 million, with fair value of $245 million, interest at 6.00% due in 1995) . . . . . . . . . . . . . . . . . . . . . 49,250 248,313 --------- --------- Total short term . . . . . . . . . . . . . . . . . . . . . . . . . 848,033 2,321,433 --------- --------- Long term: Mortgage-backed securities of $1.3 billion, with fair value approximating $1.3 billion, sold with agreements to repurchase the same securities. (1994-$1.1 billion sold with fair value of $1.0 billion): With a weighted average interest rate of 5.95% and 5.82% at December 31, 1995 and 1994, respectively, resetting quarterly based on three-month LIBOR and capped at 6.06% through 1996, due in 1998 . . . . . . . . . 491,487 485,002 With an interest rate of 6.17% and 5.68% at December 31, 1995 and 1994, respectively, resetting quarterly based on three-month LIBOR and capped at 6.24%, due in 1997 . . . . . . . . . . . . . . . . . . . 175,000 175,000 With a weighted average interest rate of 4.96%, due in 1996, callable by the Company at par . . . . . . . . . . . . . . . . . . . . 275,000 275,000 With a weighted average interest rate of 5.44%, due in 1998 . . . . . . 200,000 - With an interest rate of 5.84%, due in 1999 . . . . . . . . . . . . . . 100,000 - --------- --------- Total long term . . . . . . . . . . . . . . . . . . . . . . . . . . 1,241,487 935,002 --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,089,520 3,256,435 ========= ========= Weighted average interest cost including amortization of fees . . . . . . . 5.80% 5.63% Weighted average interest cost including the annualized effect of the ========= ========= applicable swaps, caps and amortization of deferred net gains on terminated swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.68% 7.16% ========= =========
The $200 million of fixed-rate agreements maturing in 1998 are convertible, at the counterparty's option, to a floating rate of three-month LIBOR, beginning June 1997 and quarterly thereafter. The securities sold under agreements to repurchase were delivered to the primary dealers who arranged or were party to the transactions. They may have sold, loaned, or otherwise disposed of such securities to other parties and have agreed to resell the same securities back to the Company at maturity of the agreements. At December 31, 1995 there were no amounts at risk with any counterparties exceeding 10 percent of shareholders' equity. The amount at risk is equal to the excess of the carrying value of the securities sold under agreements to repurchase over the amount of the repurchase liability. The maximum month-end balance of outstanding agreements to repurchase the same securities was $3.6 billion in 1995 and $3.5 billion in 1994. The average balance was $3.2 billion and $3.3 billion during 1995 and 1994, respectively. The Company has entered into interest rate swap, cap and collar agreements applicable to reverse repurchase agreements. Reference is made to Note 13, "Interest Rate Risk Management," for additional discussion. There were no such positions applicable to reverse repurchase agreements outstanding at December 31, 1995. 63 66 12. OTHER BORROWINGS Other borrowings consist of the following:
December 31, --------------------- 1995 1994 ---- ---- (dollars in thousands) Zero coupon bonds of $407 million due February 2005, with yield to maturity of 11.39% . . . . . . . . . . . . . . . . . . . . . . $ 145,684 130,223 Mortgage loan sale agreement . . . . . . . . . . . . . . . . . . . . . . . . 10,351 15,581 Variable-rate bonds, due December 1, 2015, interest payable semi- annually at 4.75% with a ceiling of 9.5% . . . . . . . . . . . . . . . . . . 10,000 10,000 Installment obligations without recourse . . . . . . . . . . . . . . . . . . 35,663 - Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,322 3,066 -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 209,020 158,870 ======== ========
The zero coupon bonds are collateralized by mortgage-backed securities of $354 million and $297 million at December 31, 1995 and 1994, respectively. Prior to acquisition by the Company, Women's Federal sold various tax-exempt mortgage loans under a mortgage loan sale agreement. Under certain conditions, the Bank may be obligated to repurchase these loans; therefore, the sale has been recorded as a financing transaction. The mortgage loans sold under this agreement are fixed-rate loans with remaining maturities ranging from 104 to 225 months at December 31, 1995. The interest rate at December 31, 1995 was 5.35%. A letter of credit, guaranteed by the Bank, has been issued to the purchaser as collateral for financial performance. This letter of credit is collateralized by $18,201,000 of real estate loans. The variable-rate bonds are collateralized by a letter of credit, guaranteed by the Company. The variable-rate bonds are redeemable at the option of a subsidiary of the Bank on December 1, 2000 at the principal amount plus accrued interest. The installment obligations are collateralized by leased equipment and future lease revenues. The Company assigned the rentals under many leases on a nonrecourse basis. In the event of a default by a lessee, there is no recourse against the Company. 13. INTEREST RATE RISK MANAGEMENT The Company utilizes various types of interest rate contracts in managing its interest rate risk on certain of its deposits and FHLB advances. The Company has utilized fixed payment swaps to convert certain of its floating-rate or short-term, fixed-rate liabilities into longer term, fixed-rate instruments. Under these agreements, the Company has agreed to pay interest to the counterparty on a notional principal amount at a fixed rate defined in the agreement, and receive interest at a floating rate indexed to LIBOR. The amounts of interest exchanged are calculated on the basis of notional principal amounts. The Company also utilizes fixed receipt swaps to convert certain of its longer-term callable certificates of deposit into short-term variable instruments. Under these agreements the Company has agreed to receive interest from the counterparty on a notional amount at a fixed rate defined in the agreement, and to pay interest at a floating rate indexed to LIBOR. 64 67 Information on the swaps, by maturity date, follows:
December 31, --------------------------------------------------------------------------- 1995 1994 --------------------------------- ----------------------------------- Notional Receiving Paying Notional Receiving Paying Principal Interest Interest Principal Interest Interest Amount Rate Rate Amount Rate Rate --------- --------- -------- --------- --------- -------- (dollars in thousands) FIXED PAYMENT AND VARIABLE RECEIPT 1995 1st quarter . . . . . $ 85,000 5.39% 11.90% 2nd quarter . . . . . 185,000 6.20 11.29 3rd quarter . . . . . 350,000 5.44 9.98 4th quarter . . . . . 536,000 6.30 10.28 1999 1st quarter . . . . . $ 100,000 6.02% 10.09% 700,000 5.40 10.05 -------- ----- ------ ---------- ---- ------ Total $ 100,000 6.02%(a) 10.09% 1,856,000 5.75%(a) 10.31% ======== ===== ====== ========== ==== ====== VARIABLE PAYMENT AND FIXED RECEIPT 1997 4th quarter . . . . . $ 45,000 6.30% 5.63% 1999 1st quarter . . . . . 150,000 6.09% 5.94% 2000 3rd quarter . . . . . 90,000 7.15 5.63 4th quarter . . . . . 20,000 6.79 5.63 -------- ----- ------ ---------- ---- ------ Total $ 155,000 6.86% 5.63%(a) 150,000 6.09% 5.94%(a) ======== ===== ====== ========== ==== ====== - -----------------------
(a) Rates are based upon LIBOR. The Company also utilized swaps to hedge a special class of certificates of deposit. These swaps provide for the receipt of variable interest based upon the S&P 500 Index, and the payment of both fixed and variable interest. The notional principal amount outstanding at December 31, 1995 of these agreements was $24.2 million with a weighted average receipt rate of 14.28% and payment rate of 5.85% at that date. As of December 31, 1994, the outstanding principal was $10.3 million with receipt and pay rates of 2.42% and 5.06%, respectively. In March 1995, the Company entered into $300 million of four-year interest rate floor agreements maturing in March 1999, which provide for receipt of interest when six-month LIBOR falls below 6.00%. The Company receives the difference between 6.00% and LIBOR at the time of repricing, calculated on the $300 million notional amount. At December 31, 1995, interest received of .07% was offset by a .07% per annum fee cost. In the fourth quarter of 1995, as part of a balance sheet repositioning due to the merger with FirstFed, the Company terminated $600 million of swaps which were scheduled to mature in 1999, resulting in a pretax loss of $72.0 million. The loss was recognized immediately in the statement of operations, as the liabilities to which the agreements were assigned were eliminated in connection with the repositioning. The Company also terminated a $150 million swap which resulted in a gain of $1.0 million. The gain was def%rred and will be amortized straight line over the original life of the agreement, as the liability to which it was assigned remained outstanding. An additional pretax loss of $4.2 million was also recognized in the fourth quarter of 1995 when $800 million of 8% interest rate caps were terminated and the corresponding liabilities were eliminated. In the first quarter of 1994, as part of a financial restructuring, FirstFed terminated $900 million of interest rate exchange agreements which were scheduled to mature in 1996 through 1999, resulting in a pretax loss of $138.7 million. This loss was recognized immediately in the statement of operations, as the liabilities to which the agreements were assigned were also eliminated in connection with the restructuring. A pretax loss of $4.3 million 65 68 was also recognized when a $100 million interest rate collar agreement was effectively terminated by entering into an offsetting interest rate floor agreement. In addition, a previously deferred and unamortized loss of $12.4 million was recognized in the quarter. The previously terminated agreement had been assigned to liabilities which were eliminated in connection with the restructuring. The total loss of $155.4 million was recorded as a loss on termination of interest rate exchange agreements in the 1994 statement of income. The unamortized net gains on terminated swaps were deferred when the liabilities to which they were assigned remain outstanding. The gains are being amortized over the original lives of the agreements. The unamortized net gain on terminated swaps was $6.7 million at December 31, 1995. Amortization of deferred net gains against interest expense totaled $6.8 million, $6.6 million and $3.5 million in 1995, 1994 and 1993, respectively. Amortization of the $6.7 million of remaining deferred net gains at December 31, 1995, is expected to be $4.7 million in 1996, $1.1 million in 1997, $643,000 in 1998 and $313,000 in 1999. The interest rate exchange agreements have been entered into with three nationally recognized primary dealers. The payments on these agreements have been collateralized with $56 million of mortgage-backed securities at December 31, 1995, held by the counterparties. In the event of a counterparty default, the Company is subject to risk to the extent that the value of the collateral exceeds the Company's net obligations under the agreements, and to the extent that any agreements have to be replaced under market conditions which are not favorable to the Corporation. The Company does not currently anticipate a default by any of the counterparties. The Company has entered into caps with primary dealers to limit its exposure to rising rates on certain of its variable-rate and short- term, fixed-rate liabilities. These stand-alone agreements supplement the cap provisions which have been incorporated into some of the Company's borrowings. The agreements provide for receipt of interest when three-month LIBOR exceeds an agreed upon base rate. The Company receives a rate of interest equal to the excess of three-month LIBOR at the time of repricing over the 6.00% base rate, calculated on a notional principal amount. The agreements reprice quarterly. Fees paid at inception of the agreements are being amortized over the terms of the agreements. Unamortized fees totaled $2.4 million at December 31, 1995. Outstanding caps are described in the following table:
December 31, ------------------------------------------------------------------------------------- 1995 1994 -------------------------------------- ------------------------------------------- Per Per Notional Interest Annum Notional Interest Annum Principal Base Rate Cost of Principal Base Rate Cost of Maturing In Amount Rate Received Fee Amount Rate Received Fee ----------- --------- ------ -------- ------ ---------- ---- -------- -------- 1996 1st quarter . . . $ 200,000 6.00%0 -% .21% $ 200,000 6.00% .41% .21% 1997 1st quarter . . . 650,000 6.00 - .31 650,000 6.00 .03 .30 3rd quarter . . . - - - - 620,000(a) 8.00 - .32 --------- ----- --- --- ----------- ---- --- --- Total . . . . . $ 850,000 6.00% -% .28% $ 1,470,000 6.84% .07% .29% ========= ===== === === =========== ==== === === - ------------------------ (a) Cap agreements were terminated in 1995.
The Company is exposed to credit loss in the event of nonperformance by the counterparties to the swaps, floors and caps. The Company, however, does not currently anticipate nonperformance by the counterparties. The cost of interest rate exchange, cap, floor and collar positions, including amortization of gains and losses on terminated positions, was included in interest expense as follows:
Year Ended December 31, ------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Interest expense: Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,745 41,561 66,888 FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . 2,201 2,202 - Reverse repurchase agreements . . . . . . . . . . . . . . . . . . 30,914 73,014 133,672 ------ ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,860 116,777 200,560 ====== ======= =======
66 69 14. FEDERAL INCOME TAXES In accordance with SFAS No. 109, deferred income tax assets and liabilities are computed annually for differences between financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period adjusted for the change during the period in deferred tax assets and liabilities. The provision for federal income taxes consists of the following components:
Year Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,581 (4,806) 57,415 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,408) 11,862 (1,000) ------- ------ ------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,173 7,056 56,415 ======= ====== ======
A reconciliation from tax at the statutory rate to the income tax provision is as follows:
Year Ended December 31, ----------------------------------------------------------------------- 1995 1994 1993 ------------------ ------------------ ------------------ Dollars Rate Dollars Rate Dollars Rate ------- ---- ------- ---- ------- ---- (dollars in thousands) Tax at statutory rate . . . . $ 18,622 35.0% $ 7,937 35.0% $ 56,285 35.0% Increase (decrease) due to: Bad debt deduction . . . . - - 4,000 17.6 - - Purchase accounting . . . - - (3,877) (17.1) 2,500 1.5 Other . . . . . . . . . . . 551 1.0 (1,044) (4.5) (2,370) (1.4) -------- ----- -------- ---- --------- ---- Income tax provision. . . $ 19,173 36.0% $ (7,056) 31.0% $ 56,415) 35.1% ======== ===== ======== ==== ========= ====
Significant components of the deferred tax assets and liabilities are as follows. No valuation allowance was considered necessary.
December 31, --------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Deferred tax assets: Net unrealized loss on securities available for sale . . . . . . . $ 15,978 30,647 - Book allowance for loan losses . . . . . . . . . . . . . . . . . . 21,483 22,323 23,568 Accrued and deferred compensation . . . . . . . . . . . . . . . . . 3,062 2,661 2,683 Allowance for uncollected interest . . . . . . . . . . . . . . . . 946 970 1,420 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,566 19,088 28,756 ------- ------- ------- Total deferred tax assets . . . . . . . . . . . . . . . . . . . . 62,035 75,689 56,427 ------- ------- ------- Deferred tax liabilities: FHLB stock dividends . . . . . . . . . . . . . . . . . . . . . . . 12,668 10,928 11,260 Tax allowance for loan losses . . . . . . . . . . . . . . . . . . . 7,987 9,094 7,169 Purchase accounting . . . . . . . . . . . . . . . . . . . . . . . . 1,738 1,647 3,506 Mark-to-market . . . . . . . . . . . . . . . . . . . . . . . . . . 678 2,295 - Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,690 6,318 6,111 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,976 914 148 ------- ------- ------- Total deferred tax liabilities. . . . . . . . . . . . . . . . . . 28,737 31,196 28,194 ------- ------- ------- Net deferred tax asset . . . . . . . . . . . . . . . . . . . . $ 33,298 44,493 28,233 ======= ======= =======
67 70 Retained earnings at December 31, 1995 includes approximately $168 million of income that has not been subject to tax because of deductions for bad debts allowed for federal income tax purposes. Deferred income taxes have not been provided on such bad debt deductions since the Bank does not intend to use the accumulated bad debt deductions for purposes other than to absorb loan losses. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes may be imposed on such amounts at the then current corporate income tax rate. 15. SHAREHOLDERS' EQUITY The Bank may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause shareholders' equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. At December 31, 1995, approximately $186 million of the Bank's retained earnings was available to pay dividends to the Company. On October 27, 1995, in conjunction with the merger with FirstFed, the shareholders of Charter One voted to increase the authorized number of shares of preferred stock and common stock. The authorized number of shares of preferred stock was increased to 20.0 million from 10.0 million. The authorized number of shares of common stock was increased to 180.0 million from 90.0 million. During 1994, the Board of Directors of the Company authorized management to repurchase up to 1.2 million shares of its outstanding common stock. The authorization provides that repurchases shall be made from time to time through open market purchases or unsolicited negotiated transactions and that shares repurchased shall be held in treasury and be available for issuance upon the exercise of stock options or for other corporate purposes. Under this authorization, 718,100 shares of stock were repurchased in 1995 for an aggregate price of $19.8 million, and 48,000 shares were purchased in 1994 for an aggregate price of $935,000. A portion of the shares were reissued in connection with the exercise of stock options. The difference between the repurchase and reissuance prices was treated as a reduction of retained earnings. In October 1993, the Company approved a three-for-two stock split, effective November 1993. A total of 7.5 million shares of common stock were issued in connection with the split. In the third quarter of 1993, FirstFed declared a three-for-two stock split. A total of 7.4 million shares of common stock were issued in connection with the split. All references to the number of common shares and per common share amounts have been restated retroactively to reflect these stock splits. 16. REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the tables below) of tangible, core and total risk-based capital. Prompt Corrective Action regulations require specific supervisory actions as capital levels decrease. To be considered adequately capitalized under the regulatory framework for Prompt Corrective Action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in the tables below. 68 71 The following presents the Bank's regulatory capital levels and ratios relative to its minimum capital requirements:
As of December 31, 1995 ------------------------------------------------ Actual Capital Required Capital ------------------- ------------------- Amount Ratio Amount Ratio ------ ----- ------ ----- (dollars in thousands) Capital adequacy: Tangible capital . . . . . . . . . . . . . . . $ 822,670 6.11% $ 202,027 1.50% Core capital . . . . . . . . . . . . . . . . . 822,670 6.11 404,053 3.00 Risk-based capital . . . . . . . . . . . . . . 875,176 14.29 489,835 8.00 Prompt corrective action: Tier 1 leverage capital . . . . . . . . . . . . 822,670 6.11 538,738 4.00 Tier 1 risk-based capital . . . . . . . . . . . 822,670 13.44 244,917 4.00 Total risk-based capital . . . . . . . . . . . 875,176 14.29 489,835 8.00
As of December 31, 1994 ------------------------------------------------ Actual Capital Required Capital ------------------- ------------------- Amount Ratio Amount Ratio ------ ----- ------ ----- (dollars in thousands) Capital adequacy: Tangible capital . . . . . . . . . . . . . . . $ 836,024 5.74% $ 218,284 1.50% Core capital . . . . . . . . . . . . . . . . . 836,024 5.74 436,568 3.00 Risk-based capital. . . . . . . . . . . . . . . 895,551 14.60 490,625 8.00 Prompt corrective action: Tier 1 leverage capital . . . . . . . . . . . . 836,024 5.74 582,091 4.00 Tier 1 risk-based capital . . . . . . . . . . . 836,024 13.63 245,313 4.00 Total risk-based capital . . . . . . . . . . . 895,551 14.60 490,625 8.00
Management believes, as of December 31, 1995, that the Bank meets all capital requirements to which it is subject. Events beyond management's control, such as fluctuations in interest rates or a downturn in the economy in areas in which the Bank's loans and securities are concentrated, could adversely affect future earnings and, consequently, the Bank's ability to meet its future capital requirements. 17. STOCK PURCHASE RIGHTS Each share of the Company's common stock outstanding entitles the shareholder to one stock purchase right. Each right will entitle the registered holder to purchase one one-hundredth of a share of a new series of preferred stock at a price of $40.00 (subject to adjustment). The rights have additional provisions which, subject to the approval of the Board of Directors, (1) will entitle the holder to purchase the Company's authorized and unissued common stock at a price below its market value (as defined in the agreement) in the event that any person or group acquires 20% or more of the common stock of the Company without the consent of the Company, and (2) will entitle the holder to purchase shares of common stock of the acquiring company at a price below the market value (as defined in the agreement) in the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earnings power (as defined) are sold. The rights expire on December 1, 1999, and may be redeemed by the Company for $.01 per right at any time prior to an acquisition of 20% or more of the common stock of the Company and thereafter under certain circumstances including in connection with a business combination consented to by the Company. There are 45,017,526 rights outstanding at December 31, 1995 and 600,000 shares of preferred stock reserved for these rights. 18. BENEFIT PLANS EMPLOYEE STOCK OWNERSHIP AND PENSION PLANS The Company has an Employee Stock Ownership Plan ("ESOP") and had a noncontributory defined benefit pension plan ("Charter One Pension Plan") through April 30, 1994. Effective April 30, 1994, the Bank's board of directors approved an amendment to provide for 100% vesting of accrued benefits and to freeze benefits accrued under the 69 72 Charter One Pension Plan. The effect of this curtailment was not material. The Charter One Pension Plan was terminated and all assets were distributed in the fourth quarter of 1995. FirstFed also had a noncontributory defined benefit pension plan ("FirstFed Pension Plan"). Effective October 31, 1995, the FirstFed board of directors approved an amendment to provide for 100% vesting of accrued benefits and to freeze benefits accrued under the FirstFed Pension Plan in anticipation of termination. The effect of this curtailment was not material. Benefits accrued through October 31, 1995 under the FirstFed Pension Plan will be paid to plan participants in the form of annuity contracts or lump sum payments, at the participant's option. Any assets remaining after distribution of the accrued benefits will be allocated among participants at October 31, 1995, and distributed in the same manner as accrued benefits. The Company's funding policy for the ESOP is to make discretionary contributions to the plan, subject to the debt service requirements of the ESOP borrowings. Such borrowings were fully repaid during 1993. Contributions to the ESOP were $250,000, $2 million, and $995,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company's funding policy prior to the freeze of Charter One Pension Plan benefits was to contribute to the Charter One Pension Plan amounts necessary, after consideration of ESOP contributions, to satisfy the funding requirements of federal law and regulations. The funding policy for the FirstFed Pension Plan was to contribute amounts necessary to satisfy the funding requirements of federal law and regulations. ESOP assets consist principally of Company stock. At December 31, 1995 and 1994, the ESOP held approximately 3.4% and 3.8%, respectively, of the total outstanding shares of Company stock. The Charter One Pension Plan and FirstFed Pension Plan assets consist principally of fixed-income and listed equity securities, including Company stock. Costs of the Charter One Pension Plan (in the two years prior to termination) and the ESOP consisted of the following components:
December 31, ------------------ 1994 1993 ---- ---- (dollars in thousands) Service cost - benefits earned during the year . . . . . . . . . . . . . . . . $ 134 616 Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . 298 549 Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . (102) (743) Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . . (599) 67 ------ ------ Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . (269) 489 Contributions to ESOP expensed as costs of the plan . . . . . . . . . . . . . . 2,000 995 ------ ------ Total cost of Charter One Pension Plan and ESOP . . . . . . . . . . . . . . . $ 1,731 1,484 ====== ======
The following table sets forth the Charter One Pension Plan's funded status and prepaid pension cost:
December 31, 1994 --------------------- (dollars in thousands) Projected benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,901) Plane assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,958 ------- Plan assets in excess of projected benefit obligation . . . . . . . . . . . . . . . . . 3,057 Unrecognized net asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,549) ------- Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 508 =======
Assumptions used in accounting for the Charter One Pension Plan and ESOP were as follows:
1994 1993 ---- ---- Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.00% 7.00% Rate of increase in compensation levels . . . . . . . . . . . . . . . . . . . . . 6.00 5.56 Expected long term rate of return on plan assets. . . . . . . . . . . . . . . . . 7.50 7.70
70 73 Costs of the FirstFed Pension Plan consist of the following components:
Year Ended December 31, ----------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Service cost - benefits earned during the year . . . . . . . . . $ 1,278 2,413 2,234 Interest cost on projected benefit obligation . . . . . . . . . . 4,189 4,203 3,959 Actual return on plan assets . . . . . . . . . . . . . . . . . . (9,935) 222 (6,012) Net amortization and deferral . . . . . . . . . . . . . . . . . . 4,292 (5,181) 1,291 -------- ------ ----- Net periodic pension cost . . . . . . . . . . . . . . . . . . . . (176) 1,657 1,472 Curtailment gain recognized due to staff reductions . . . . . . . - (785) - -------- ------ ----- Total cost of FirstFed Pension Plan . . . . . . . . . . . . . . $ (176) 872 1,472 ======== ====== =====
The following table sets forth the FirstFed Pension Plan's funded status and prepaid pension cost:
December 31, --------------------- 1995 1994 ---- ---- (dollars in thousands) Accumulated benefit obligation: Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (59,080) (41,641) Nonvested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (392) -------- ------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59,080) (42,033) Effects of projected compensation increases . . . . . . . . . . . . . . . . - (7,879) -------- ------ Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . (59,080) (49,912) Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . 59,080 53,787 -------- ------ Plan assets in excess of projected benefit obligation . . . . . . . . . . . - 3,875 Unrecognized net loss (asset) . . . . . . . . . . . . . . . . . . . . . . . 1,751 (3,708) -------- ------ Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,751 167 ======== ======
Assumptions used in accounting for the FirstFed Pension Plan were as follows:
1995 1994 1993 ---- ---- ---- Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.00% 8.50% 7.00% Rate of increase in compensation levels . . . . . . . . . . . . . . 4.00 4.00 4.75 Expected long-term rate of return on plan assets . . . . . . . . . 9.50 9.50 10.00
The Bank has a trusteed employee savings plan covering substantially all salaried employees. Under the terms of the Trust Agreement, the Bank's annual contribution to the plan is based on matching contributions of participating employees up to 9% of base salary. The Bank may terminate the plan at any time. In the past, FirstFed voluntarily provided health care and life insurance benefits to substantially all retired employees, on an unfunded, noncontributory basis. The cost of providing these benefits was expensed as paid. In 1992, the plan was amended for employees retiring after September 30, 1992, and now requires the employees to pay the full cost of health care benefits after retirement. In 1993, FirstFed adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106 requires that the cost of providing such benefits be recognized over the employees' service periods rather than on a cash basis. FirstFed elected to amortize the accumulated postretirement benefit obligation of $9.3 million over 20 years. 71 74 Net periodic postretirement benefit cost included the following components:
YEAR ENDED DECEMBER 31, ----------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Service cost - benefits earned during the period . . . . . . . . . . . . $ 10 16 15 Interest cost on accumulated postretirement benefit obligation . . . . . 714 694 666 Amortization of unrecognized transition obligation . . . . . . . . . . . 464 464 464 Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . - 9 - ----- ----- ----- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,188 1,183 1,145 ===== ===== =====
The following table sets forth the amounts reported in the Company's consolidated statements of financial condition:
DECEMBER 31, ------------------ 1995 1994 ---- ---- (dollars in thousands) Accumulated postretirement benefit obligation: Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,939) (9,181) Fully eligible active plan participants . . . . . . . . . . . . . . . . . . . (136) (102) Other active plan participants . . . . . . . . . . . . . . . . . . . . . . . (169) (129) ------ ------ (9,244) (9,412) Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . - - ------ ------ Accumulated postretirement benefit obligation in excess of plan assets . . . . (9,244) (9,412) Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 367 Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . - - Unrecognized transition obligation . . . . . . . . . . . . . . . . . . . . . . 7,893 8,357 ------ ------ Accrued postretirement benefit cost included in other liabilities . . . . . $(1,222) (688) ====== ======
A discount rate of 7.00% was used to measure the accumulated postretirement benefit obligation as of December 31, 1995. The rate of increase in health care costs was assumed to be 10.11% in 1996, grading down uniformly to 5.00% in 2003 and all years thereafter. A 1.00% increase in the health care cost trend rate assumptions would increase the December 31, 1995, accumulated postretirement benefit obligation by $721,000 and would increase the aggregate of the service and interest cost components of 1995 net periodic postretirement benefit cost by $46,000. 72 75 19. STOCK OPTION PLANS The Company has five stock option plans under which 4,271,943 shares of common stock are reserved for grant to directors, officers and key employees. The Plans provide that option prices will not be less than the fair market value of the stock at the grant date. The date on which the options are first exercisable is determined by the Stock Option Committee of the Board of Directors (the "Committee"). The options expire no later than ten years from the grant date. The following is an analysis of the stock option activity for each of the years in the three-year period ended December 31, 1995 and the stock options outstanding at the end of the respective periods.
Exercise Price Number ---------------------------------- Options of Shares Per Share Total ------- --------- ----------------- ------------ Outstanding at January 1, 1993 . . . . . . . . . 2,055,724 $ 3.02 - $15.50 $ 16,854,219 Granted . . . . . . . . . . . . . . . . . . . . . 647,100 17.64 - 20.83 11,732,624 Exercised . . . . . . . . . . . . . . . . . . . . (370,525) 3.02 - 15.50 (1,847,713) Canceled - stock appreciation rights exercised . (9,360) 6.46 (60,450) Forfeited . . . . . . . . . . . . . . . . . . . . (33,000) 15.50 - 17.64 (549,990) --------- ------ ------ ----------- Outstanding at December 31, 1993 . . . . . . . . 2,289,939 3.11 - 20.83 26,128,690 Granted . . . . . . . . . . . . . . . . . . . . . 27,000 20.25 - 22.63 571,500 Exercised . . . . . . . . . . . . . . . . . . . . (149,847) 3.56 - 15.50 (915,122) Canceled - stock appreciation rights exercised . (4,200) 6.46 (27,125) Forfeited . . . . . . . . . . . . . . . . . . . . (12,682) 3.11 - 19.11 (208,679) --------- ------ ------ ----------- Outstanding at December 31, 1994 . . . . . . . . 2,150,210 3.11 - 22.63 25,549,264 Granted . . . . . . . . . . . . . . . . . . . . . 69,000 19.25 - 26.75 1,401,375 Exercised . . . . . . . . . . . . . . . . . . . . (702,111) 3.56 - 20.25 (8,231,201) Canceled - stock appreciation rights exercised . (3,780) 6.46 (24,413) Forfeited . . . . . . . . . . . . . . . . . . . . (27,921) 15.50 - 19.11 (441,058) --------- ------ ------ ----------- Outstanding at December 31, 1995 . . . . . . . . 1,485,398 $ 3.11 - $26.75 $ 18,253,967 ========= ====== ====== =========== Exercisable at December 31, 1995 . . . . . . . . 1,253,498 $ 3.11 - $22.63 $ 13,830,847 ========= ====== ====== =========== Options available for future grants at December 31, 1995 . . . . . . . . . . . . . . 2,786,545 =========
Stock appreciation rights may be granted alone or in conjunction with options granted to officers and key employees. Upon exercise, the payment may be made in cash, shares or partly in each. The Company accrues compensation expense for the amount by which the market value of the shares exceed the exercise price of the appreciation rights. All appreciation rights expire on January 29, 1998. Costs of the appreciation rights are accrued and charged to salaries and employee benefits expense. The following is an analysis of the stand-alone stock appreciation rights activity for each of the years in the three-year period ended December 31, 1995 and the stock appreciation rights outstanding at the end of the respective periods.
Number Exercise Price of ------------------------ Appreciation Rights Rights Per Share Total --------------------------------------------------------- ------ --------- ----- Outstanding at January 1, 1993 and December 31, 1993 . 162,004 $ 3.555 $ 576,000 Exercised . . . . . . . . . . . . . . . . . . . . . . . (40,501) 3.555 (144,000) ------- -------- ---------- Outstanding at December 31, 1994 . . . . . . . . . . . 121,503 3.555 432,000 Exercised . . . . . . . . . . . . . . . . . . . . . . . (64,689) 3.555 (230,000) ------- -------- ---------- Outstanding at December 31, 1995. . . . . . . . . . . . 56,814 $ 3.555 $ 202,000 ======= ======== ========== Exercisable at December 31, 1995 . . . . . . . . . . . 56,814 $ 3.555 $ 202,000 ======= ======== ==========
73 76 The Committee may also award restricted shares of common stock and performance units to officers and key employees. The terms of the grants are determined by the Committee at the date of the award. As of December 31, 1995 no awards of restricted shares of common stock or performance units had been made. INCENTIVE COMPENSATION PLAN The Bank maintains an incentive compensation plan (the "Incentive Plan") which provides for annual cash bonuses to certain management employees as a means of recognizing achievement on the part of such employees. The bonuses are determined based on a combination of the Bank's and the individual employee's performance during the year. Amounts are accrued and charged to expense during the year pursuant to the Incentive Plan. 74 77 20. EARNINGS PER SHARE The following table details the calculation of earnings per share:
Year Ended December 31, --------------------------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands, except per share data) Primary: Earnings before extraordinary item . . . . . . . . . $ 34,032 15,619 104,400 Extraordinary item, net of federal income tax benefit - (12,348) - ---------- ----------- ----------- Net earnings applicable to common stock and common stock equivalents . . . . . . . . . . $ 34,032 3,271 104,400 ========== =========== =========== Weighted average number of common shares outstanding . . . . . . . . . . . . . . . . . 44,917,503 44,982,377 44,584,563 Add common stock equivalents for shares issuable under(1): Stock Appreciation Rights Plan . . . . . . . . . 52,799 102,786 134,150 Stock Option Plan . . . . . . . . . . . . . . . . 888,576 855,490 938,733 ---------- ----------- ----------- Weighted average number of shares outstanding adjusted for common stock equivalents . . . . 45,858,878 45,940,653 45,657,446 ========== =========== =========== Primary earnings per common share: Earnings before extraordinary item . . . . . . . . $ .74 .34 2.29 Extraordinary item . . . . . . . . . . . . . . . . - (.27) - ---------- ----------- ----------- Net earnings . . . . . . . . . . . . . . . . . . $ .74 .07 2.29 ========== =========== =========== Fully diluted: Earnings before extraordinary item . . . . . . . . . $ 34,032 15,619 104,400 Extraordinary item, net of federal income tax benefit - (12,348) - ---------- ----------- ----------- Net earnings applicable to common stock and common stock equivalents . . . . . . . . . . . . $ 34,032 3,271 104,400 ========== =========== =========== Weighted average number of common shares outstanding . . . . . . . . . . . . . . . . . 44,917,513 44,985,649 44,639,256 Add common stock equivalents for shares issuable under(2): Stock Appreciation Rights Plan . . . . . . . . . 60,631 107,106 135,258 Stock Option Plan . . . . . . . . . . . . . . . . 1,154,330 863,855 1,103,153 ---------- ----------- ----------- Weighted average number of shares outstanding adjusted for common stock equivalents . . . . 46,132,474 45,956,610 45,877,667 ========== =========== =========== Fully diluted earnings per common share: Earnings before extraordinary item . . . . . . . . $ .74 .34 2.28 Extraordinary item . . . . . . . . . . . . . . . . - (.27) - ---------- ----------- ----------- Net earnings . . . . . . . . . . . . . . . . . . $ .74 .07 2.28 ========== =========== =========== - ------------------- (1) Additional shares issuable were derived under the "treasury stock method" using average market price during the period. (2) Additional shares issuable were derived under the "treasury stock method" using the higher of the average market price during the period or the market price at the end of the period.
75 78 21. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash, Cash Equivalents, Accrued Interest Receivable and Payable and Advance Payments by Borrowers for Taxes and Insurance - The carrying amount as reported in the Consolidated Statement of Financial Condition is a reasonable estimate of fair value. Mortgage-Backed and Investment Securities - Fair values are based on quoted market prices, dealer quotes and prices obtained from independent pricing services. Loans and Leases- The fair value is estimated by discounting the future cash flows using the current rates for loans and leases of similar maturities with adjustments for market and credit risks. Nonperforming loans are valued using the discounted cash flows method. Federal Home Loan Bank Stock - The fair value is estimated to be the carrying value which is par. All transactions in the capital stock of the Federal Home Loan Bank are executed at par. Deposits - The fair value of demand deposits, savings accounts and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. Federal Home Loan Bank Advances, Reverse Repurchase Agreements, and Other Borrowings - Rates currently available to the Bank for borrowings with similar terms and remaining maturities are used to estimate fair value of existing borrowings. Interest Rate Swap, Cap and Floor Agreements - The fair value is estimated as the difference in the present value of future cash flows between the Company's existing agreements and current market rate agreements of the same duration. 76 79 The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1995 and 1994. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
December 31, 1995 December 31, 1994 ------------------------- ---------------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- (dollars in thousands) Assets: Cash and cash equivalents . . . . . . . $ 658,371 658,371 341,935 341,935 Investment securities . . . . . . . . . 407,427 407,427 467,247 467,247 Mortgage-backed securities . . . . . . 5,314,749 5,396,915 6,628,591 6,390,710 Loans and leases . . . . . . . . . . . 6,678,600 6,739,819 6,592,975 6,430,480 Federal Home Loan Bank stock . . . . . 178,136 178,136 162,013 162,013 Accrued interest receivable . . . . . . 73,683 73,683 78,303 78,303 Liabilites: Deposits: Checking, savings and money market accounts . . . . . . . . . . 2,570,227 2,570,227 2,760,388 2,760,388 Certificates of deposit . . . . . . . 4,442,264 4,472,956 4,328,765 4,299,344 Federal Home Loan Bank advances . . . . 3,163,144 3,169,582 2,968,290 2,929,810 Reverse repurchase agreements . . . . . 2,089,520 2,088,142 3,256,435 3,227,000 Other borrowings . . . . . . . . . . . 209,020 300,156 158,870 190,152 Advance payments by borrowers for taxes and insurance . . . . . . . . . 47,738 47,738 55,102 55,102 Accrued interest payable . . . . . . . 56,955 56,955 90,894 90,894 Off-Balance-Sheet Items: Interest rate swaps in a net receivable position . . . . . . . . . - 5,450 - 10 Interest rate swaps in a net payable position . . . . . . . . . . . - (12,243) - (75,742) Interest rate cap and floor agreements - (1,738 ) - 24,000
22. STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURE Supplemental disclosures of cash flow information are summarized below:
Year Ended December 31, ------------------------------------ 1995 1994 1993 ---- ---- ---- (dollars in thousands) Supplemental disclosures of cash flow information: Cash paid during the year for: Interest on deposits and borrowings . . . . . . . . . . . $ 707,868 639,066 713,631 Income taxes . . . . . . . . . . . . . . . . . . . . . . 2,280 29,360 46,926 Supplemental schedule of noncash activities: Loans exchanged for mortgage-backed securities . . . . 331,426 28,692 309,826 Securities transferred from held to maturity to available for sale . . . . . . . . . . . . . . . . . . . 1,961,199 17,413 - Securities transferred from available for sale to held to maturity . . . . . . . . . . . . . . . . . . . 79,618 1,032,733 - Securities transferred from held for sale to trading - 33,213 - Transfers from loans to real estate owned . . . . . . . . . . 5,702 5,083 10,513 Conversion of convertible subordinated debentures into common stock . . . . . . . . . . . . . . . . . . . . . - - 23,358
77 80 23. PARENT COMPANY FINANCIAL INFORMATION The summarized financial statements of Charter One Financial, Inc. (parent company only) as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993 follow: STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, -------------------- 1995 1994 ---- ---- (dollars in thousands) Assets: Deposits with subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,596 217 Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 15,094 Investment in subsidiary, at equity . . . . . . . . . . . . . . . . . . . . 814,817 794,332 Securities and other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,446 14,580 ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 844,859 824,223 ======= ======= Liabilities: Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 461 552 ------- ------- Shareholders' equity: Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451 450 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 235,889 234,844 Retained earnings (substantially restricted) . . . . . . . . . . . . . . . 642,197 647,730 Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . (3,061) (841) Net unrealized loss on securities available for sale, net of tax benefit . (31,078) (58,512) ------- ------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 844,398 823,671 ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 844,859 824,223 ======= =======
78 81 STATEMENTS OF INCOME
Year Ended December 31, ------------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Income: Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . $ 47,500 36,250 17,500 Interest and dividends on securities . . . . . . . . . . . . . . 2,068 857 545 ------- ------- ------- Total income . . . . . . . . . . . . . . . . . . . . . . . . . 49,568 37,107 18,045 ------- ------- ------- Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,064 1,120 881 ------- ------- ------- Income before undistributed net (loss) earnings of subsidiary . . 37,504 35,987 17,164 Equity in undistributed net (loss) earnings of subsidiary . . . . (3,472) (32,716) 87,236 ------- ------- ------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,032 3,271 104,400 ======= ======= =======
STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------ 1995 1994 1993 ---- ---- ---- (dollars in thousands) Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 34,032 3,271 104,400 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net loss (earnings) of subsidiary 3,472 32,716 (87,236) Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2,350 (658) (168) --------- ------- ------- Net cash provided by operating activities . . . . . . . 39,854 35,329 16,996 --------- ------- ------- Cash flows from investing activities: Purchase of securities . . . . . . . . . . . . . . . . . . (233,756) (1,374) (5,293) Sales of securities . . . . . . . . . . . . . . . . . . . . - - 3,108 Maturity of securities . . . . . . . . . . . . . . . . . . 247,900 1,800 2,100 --------- ------- ------- Net cash provided by (used in) investing activities . . 14,144 426 (85) --------- ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock . . . . . . . . . . 1,072 984 1,989 Payment of dividends on common stock . . . . . . . . . . . (29,962) (23,405) (17,960) Net purchases of treasury stock . . . . . . . . . . . . . . (11,823) (906) - --------- ------- ------- Net cash used in financing activities . . . . . . . . . (40,713) (23,327) (15,971) --------- ------- ------- Increase in deposits with subsidiary and cash equivalents . . . . . . . . . . . . . . . . . . $ 13,285 12,428 940 ========= ======= =======
24. SUBSEQUENT EVENT On December 14, 1995, the Bank entered into a Purchase and Assumption agreement with First Nationwide Bank to acquire their 21 Michigan offices located primarily in the metropolitan Detroit area. The Bank will assume approximately $765 million in deposit liabilities associated with those offices. The assets to be acquired are primarily the cash and fixed assets associated with the 21 branches. The acquisition will be accounted for using the purchase method of accounting. If the transaction had occurred as of November 30, 1995, it is estimated the Bank would have recorded approximately $56 million in goodwill. The Bank has filed for approval of this transaction with the Office of Thrift Supervision and the transaction is expected to close late in the second quarter of 1996. 79 82 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors Charter One Financial, Inc. We have audited the accompanying consolidated statements of financial condition of Charter One Financial, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of Charter One Financial, Inc. and FirstFed Michigan Corporation which has been accounted for as a pooling of interests as described in Note 2 to the consolidated financial statements. We did not audit the financial statements of FirstFed Michigan Corporation for the years ended December 31, 1994 and 1993 which statements reflect (prior to the conforming changes referred to in Note 2 to the consolidated financial statements) total assets of $8.4 billion and $9.3 billion as of December 31, 1994 and 1993, respectively, and net loss of $96.3 million and net income of $41.4 million for the respective years then ended. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for FirstFed Michigan Corporation for such periods (prior to the conforming changes referred to in Note 2 to the consolidated financial statements) is based solely on the report of such other auditors. 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Charter One Financial, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1994 the Company changed its method of accounting for certain investments in debt and equity securities to adopt Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Deloitte & Touche LLP Cleveland, Ohio January 25, 1996 80 83 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the section captioned "Proposal 1 - Election of Directors" in the Company's definitive proxy statement for the Company's 1996 Annual Meeting of Shareholders (the "Proxy Statement") is incorporated herein by reference. Reference is also made to the information appearing in Part I - "Executive Officers," which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the sections of the Proxy Statement captioned "Compensation of Directors", "Directors' Stock Option Plan", "Executive Compensation and Other Information", "1995 Compensation Committee Report on Executive Compensation", "Compensation Committee Interlocks and Insider Participation" and "Comparison of Cumulative Total Return Among Charter One Financial, Inc., S & P 500 Index and Peer Group Index". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the section of the Proxy Statement captioned "Outstanding Voting Securities". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the section of the Proxy Statement captioned "Compensation Committee Interlocks and Insider Participation" and "Transactions with Related Parties". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 1. REPORTS OF INDEPENDENT ACCOUNTANTS 2. CONSOLIDATED FINANCIAL STATEMENTS (a) Consolidated Statements of Financial Condition as of December 31, 1995 and 1994 (b) Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 (c) Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 (d) Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 (e) Notes to Consolidated Financial Statements All financial statement schedules are omitted because the required information is not applicable or is included in the Consolidated Financial Statements or related notes. 81 84 3. EXHIBITS* (2) Agreement and Plan of Merger, dated as of May 30, 1995, by and among Charter One Financial, Inc. and FirstFed Michigan Corporation, which contains a list briefly identifying the contents of all omitted schedules and similar attachments, which Charter One agrees to furnish supplementally to the Commission upon request (filed with Charter One's Current Report on Form 8-K for the event on May 31, 1995 (as amended)). (3.1) Second Restated Certificate of Incorporation (filed with Charter One's Current Report on Form 8-K for the event on October 31, 1995). (3.2) Bylaws (filed with Charter One's Current Report on Form 8-K for the event on October 31, 1995). (4.1) Form of Certificate of Common Stock (Exhibit 4.2 to the Form S-1 dated January 22, 1988.) (Commission File No. 33-16207.) (4.2) Shareholder Rights Agreement between Charter One Financial, Inc. and First National Bank of Boston, dated May 26, 1995 (agreement filed with Charter One's Annual Report on Form 10-K for the fiscal year ended December 31, 1994; amendment included in Exhibit 2 to this report). (10.1) Charter One Financial, Inc. Long-Term Stock Incentive Plan. (Exhibit 10.1 to the Form S-1 dated January 22, 1988.) (Commission File No. 33-16207. ) (10.2) Charter One Financial, Inc. Directors Stock Option Plan. (Exhibit 10.2 to the Form S-1 dated January 22, 1988.) (Commission File No. 33-16207.) (10.3) Employment Agreements between Charter One Bank, F.S.B. and Charles John Koch and John David Koch; the Agreements were terminated on October 31, 1995. (Exhibit 10.3 to the Form S-1 dated January 22, 1988.) (Commission File No. 33-16207.) (10.4) Forms of Salary Continuation Agreement between Charter One Bank, F.S.B. and Charles John Koch, John David Koch, and Robert J. Vana; the Agreements were terminated on October 31, 1995. (Exhibit 10.7 to the Form S-1 dated January 22, 1988.) (Commission File No. 33-16207.) (10.5) Charter One Bank, F.S.B. Executive Incentive Goal Achievement Plan. (Exhibit 10.8 to the Form 10-K for the fiscal year ended December 31, 1994.) (Commission File No. 0-16311.) (10.6) Charter One Bank Pension Plan as Amended and Restated Effective January 1, 1990 and Amendment No. 1 Thereto. (Exhibit 10.9 to the Form 10-K for the fiscal year ended December 31, 1994.) (Commission File No. 0-16311.) (10.7) Charter One Bank, F.S.B. Employee Savings Plan and Trust and Amendments Thereto. (Exhibit 10.10 to the Form 10-K for the fiscal year ended December 31, 1993.) (Commission File No. 0-16311.) (10.8) Form of Employment Agreement between Charter One Bank, F.S.B. and Mark D. Grossi; the Agreement was terminated on October 31, 1995. (Exhibit 10.11 to the Form 10-K for the fiscal year ended December 31, 1993.) (Commission File No. 0-16311.) (10.9) Charter One Bank, F.S.B. Profit Sharing Plan and Amendments Thereto. (Exhibit 10.12 to the Form 10-K for the fiscal year ended December 31, 1993.) (Commission File No. 0-16311.) (10.10) First American Savings Bank, F.S.B. Nonqualified Retirement Plan and First Amendment Thereto. (Exhibit 10.17 to the Form 10-K for the fiscal year ended December 31, 1993.) (Commission File No. 0-16311.) 82 85 (10.11) FirstFed Michigan Corporation 1983 Stock Option Plan. (Filed with the Form S-8 dated November 1, 1995.) (Commission File No. 33-61273.) (10.12) FirstFed Michigan Corporation 1991 Stock Option Plan. (Filed with the Form S-8 dated November 1, 1995.) (Commission File No. 33-61273.) (10.13) First Federal of Michigan Management Incentive Award Plan, as amended and restated effective January 1, 1995; the Plan was terminated on October 31, 1995. (10.14) First Federal of Michigan Supplemental Executive Retirement Plan, as amended and restated effective January 1, 1995; the Plan was terminated on October 31, 1995. (10.15) First Federal of Michigan Equity Performance Appreciation Plan, as amended and restated effective January 1, 1995; the Plan was terminated on October 31, 1995. (10.16) Employment Agreement, dated March 10, 1994, between FirstFed Michigan Corporation, First Federal of Michigan and Richard W. Neu; the Agreement was terminated on October 31, 1995. (Exhibit 10.7 to the FirstFed Michigan Corporation Form 10-K for the fiscal year ended December 31, 1993.) (Commission File No. 0-17829.) (10.17) Retirement Plan for Salaried Employees of First Federal of Michigan, as amended and restated effective January 1, 1995. (10.18) First Federal of Michigan Salaried Employees' Profit Sharing Plan, as amended and restated effective January 1, 1995. (10.19) Forms of Supplemental Retirement Agreements, dated October 31, 1995, between Charter One Financial, Inc. and Charles John Koch, Richard W. Neu, John David Koch, Mark D. Grossi, and Robert J. Vana. (Exhibits 10.4 and 10.5 to the Form S-4 dated July 25, 1995.) (Commission File No. 33-61273.) (10.20) Forms of Employment Agreements, dated October 31, 1995, between Charter One Financial, Inc. and Charles John Koch, Richard W. Neu, John David Koch, Mark D. Grossi, and Robert J. Vana. (Exhibits 10.1, 10.2 and 10.3 to the Form S-4 dated July 25, 1995.) (Commission File No. 33-61273.) (11) Statement regarding Computation of Per Share Earnings (21) Subsidiaries of the Registrant (23.1) Consent of Deloitte & Touche LLP (23.2) Consent of KPMG Peat Marwick LLP (27) Financial Data Schedule ------------------- * Exhibits followed by a parenthetical reference are incorporated by reference herein from the document described therein. All reference filings, unless otherwise indicated, were made by Charter One Financial, Inc. 83 86 4. REPORTS ON FORM 8-K Two reports were filed on Form 8-K during the fourth quarter of 1995: (a) For the event on October 31, 1995 - Filed under Item 2 "Acquisition or Disposition of Assets" and Item 5 "Other Events" to report completion of the merger with FirstFed Michigan Corporation and the results of the related shareholder meeting. (b) For the event on December 15, 1995 - Filed under Item 5 "Other Events" to report entering into an agreement to acquire the 21 Michigan branch offices of First Nationwide. 84 87 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, in the City of Cleveland, State of Ohio, as of the 20th day of March, 1996. CHARTER ONE FINANCIAL, INC. By: CHARLES JOHN KOCH -------------------------- Charles John Koch Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and as of the date indicated.
Signature Title Date --------- ----- ---- /s/CHARLES JOHN KOCH Director, President March 20, 1996 ----------------------------- Chief Executive Charles John Koch (Principal Executive Officer) /s/RICHARD W. NEU Senior Vice President March 20, 1996 ----------------------------- Treasurer Richard W. Neu (Principal Financial Officer) /s/EUGENE B. CARROLL, SR. Director March 20, 1996 ----------------------------- Eugene B. Carroll, Sr. /s/DENISE M. FUGO Director March 20, 1996 ----------------------------- Denise M. Fugo /s/CHARLES M. HEIDEL Director March 20, 1996 ----------------------------- Charles M. Heidel /s/CHARLES F. IPAVEC Director March 20, 1996 ----------------------------- Charles F. Ipavec /s/RICHARD J. JACOB Director March 20, 1996 ----------------------------- Richard J. Jacob Director ----------------------------- John D. Koch /s/PHILIP J. MEATHE Director March 20, 1996 ----------------------------- Philip J. Meathe
85 88
Signature Title Date --------- ------- ---- /s/HENRY R. NOLTE, JR. Director March 20, 1996 ---------------------------- Henry R. Nolte, Jr. /s/ALONZO H. POLL Director March 20, 1996 ---------------------------- Alonzo H. Poll /s/VICTOR A. PTAK Director March 20, 1996 ---------------------------- Victor A. Ptak /s/JEROME L. SCHOSTAK Director March 20, 1996 ---------------------------- Jerome L. Schostak /s/MARK SHAEVSKY Director March 20, 1996 ---------------------------- Mark Shaevsky /s/ERESTEEN R. WILLIAMS Director March 20, 1996 ---------------------------- Eresteen R. Willams
86 89 Exhibit Index Exhibit No. Description - ------- ----------- (10.13) First Federal of Michigan Management Incentive Award Plan, as amended and restated effective January 1, 1995; the Plan was terminated on October 31, 1995. (10.14) First Federal of Michigan Supplemental Executive Retirement Plan, as amended and restated effective January 1, 1995; the Plan was terminated on October 31, 1995. (10.15) First Federal of Michigan Equity Performance Appreciation Plan, as amended and restated effective January 1, 1995; the Plan was terminated on October 31, 1995. (10.17) Retirement Plan for Salaried Employees of First Federal of Michigan, as amended and restated effective January 1, 1995. (10.18) First Federal of Michigan Salaried Employees' Profit Sharing Plan, as amended and restated effective January 1, 1995. (11) Statement regarding Computation of Per Share Earnings (21) Subsidiaries of the Registrant (23.1) Consent of Deloitte & Touche LLP (23.2) Consent of KPMG Peat Marwick LLP (27) Financial Data Schedule EX-10.13 2 EXHIBIT 10.13 1 EXHIBIT 10.13 FIRST FEDERAL OF MICHIGAN MANAGEMENT INCENTIVE AWARD PLAN (As Amended and Restated Effective January 1, 1995) WHEREAS, FIRST FEDERAL OF MICHIGAN, a corporation having its principal offices in the City of Detroit, Michigan (hereinafter referred to as the "Association") established an incentive plan for certain Management Officers of the Association effective January 1, 1976; and WHEREAS, the Association amended and restated such Plan effective December 1, 1984, further amended and restated such Plan effective January 1, 1986, adopted a First Amendment to the Plan as amended and restated effective January 1, 1988, and further amended and restated such Plan in order to reflect the reorganization and the establishment of FirstFed Michigan Corporation ("FirstFed Michigan") as the sole owner of all of the Association's common stock, effective as of May 1, 1989; and WHEREAS, FirstFed Michigan has entered into an Agreement and Plan of Merger (the "Merger Agreement") with Charter One Financial, Inc. ("Charter One"); and WHEREAS, the Association deems it desirable to further amend and restate the Plan to reflect the terms of the Merger Agreement and to terminate the Plan as of the effective date of the Merger between FirstFed Michigan and Charter One. NOW, THEREFORE, the Association hereby further amends and restates the Management Incentive Award Plan (hereinafter -1- 2 referred to as "MIAP" or the "Plan"), effective as of January 1, 1995, to read as follows: SECTION 1. PURPOSE. The purpose of this Plan is to provide incentive and awards to certain Management Officers of the Association who contribute to its overall growth and profitability from year to year and to aid the Association in attracting and holding competent management personnel. SECTION 2. DEFINITIONS. Whenever used herein, the following terms shall have the following meanings unless the context requires otherwise: (a) "Annual Award" means subsequent to December 31, 1985, an award to a Participant under Section 6(a) hereof, and prior to January 1, 1986, any award made pursuant to the Plan. (b) "Association" means First Federal of Michigan and on and after May 1, 1989, FirstFed Michigan, if and to the extent authorized by FirstFed Michigan; provided, however, that whenever this Plan indicates that the "Association" may or shall take any action under the Plan, such action shall be taken by First Federal of Michigan for itself and as agent for FirstFed Michigan. Notwithstanding anything herein to the contrary, in the event of the merger of FirstFed Michigan into any other corporation, such corporation shall succeed to all of the rights and responsibilities of FirstFed Michigan hereunder. -2- 3 (c) "Average Treasury Bill Discount Rate" means an average determined by dividing the sum of each of the interest auction rates established by 1-year Treasury Bill auctions throughout a given Plan Year (or Short Plan Year, if applicable) by the number of interest auction rates established during such Plan Year (or Short Plan Year, if applicable). (d) "Beneficiary" means the person or persons designated by a Participant who is or may be entitled to a benefit hereunder, or the Participant's legal representatives if no such person is designated. (e) "Board of Directors" means the Board of Directors of the Association. (f) "Charter One" means Charter One Financial, Inc. (g) "Committee" means the Compensation Committee of the Board of Directors; provided, however, that after the Company Merger Effective Time, those persons who were on the Compensation Committee of the Association on the Company Merger Effective Time shall continue to serve as the members of the Compensation Committee until this Plan is terminated and all Awards are distributed. (h) "Common Stock" means: (1) prior to May 1, 1989, the common stock, par value $0.01 per share, of the Association, and -3- 4 (2) on and after May 1, 1989 and through the Company Merger Effective Time, the common stock, par value $0.01 per share, of FirstFed Michigan. (i) "Company Merger Effective Time" means the date on which the merger between FirstFed Michigan and Charter One shall become effective, as set forth in Section 1.2 of the Merger Agreement. (j) "Compensation" means: (1) For any Plan Year prior to the Plan Year in which the Company Merger Effective Time occurs, the salary paid to the Management Officer by the Association for services rendered from the 1st day of the month with respect to which he is designated to be a Participant eligible to receive an allocation from the Award Fund for such year (as provided in Section 3 hereof) through December 31 of such year, but excluding any bonuses, special compensation, pay for overtime or premium pay and excluding the Association's cost for any other public or private benefit plan, including this Plan, under rules uniformly applicable to all Participants similarly situated. (2) For the Short Plan Year in which the Company Merger Effective Time occurs, the annualized salary paid to the Management Officer by the Association for services rendered computed based on salary paid from the 1st day of the month with respect to which he is designated to be a Participant eligible to receive an allocation from the Award Fund for such year (as provided in Section 3 hereof) through the Company Merger Effective Time, but excluding any bonuses, special compensation, pay for overtime or premium pay, and excluding the Association's cost for any other public or private benefit plan, including this Plan, under rules uniformly applicable to all Participants similarly situated and then divided by the number of days in such period and multiplied by 365. (k) "FirstFed Michigan" means FirstFed Michigan Corporation. -4- 5 (l) "Long-Term Award" means an award to a Participant under Section 6(b) hereof. (m) "Management Officers" means those persons employed by the Association in capacities such as Chairman of the Board of Directors, President, Vice Chairman of the Board of Directors, Executive Vice President or Senior Vice President of the Association. (n) "Market Price" means the closing price of the Common Stock as reported by the National Association of Securities Dealers Automated Quotations Over-The-Counter Market (National Market Issues) or if the Common Stock is listed on a national securities exchange at such time, then the closing price on such exchange at such time, or if there is no closing price at such time, then on the next prior business day on which there was a closing price. (o) "Merger Agreement" means the Agreement and Plan of Merger by and between FirstFed Michigan and Charter One. (p) "Participant" means any management officer who is designated to be a Participant in the Plan as provided in Section 3 hereof. (q) "Plan" means the First Federal of Michigan Management Incentive Award Plan, as described herein or hereafter amended. -5- 6 (r) "Plan Year" means: (1) For any period prior to the calendar year in which the Company Merger Effective Time occurs, the period beginning on January 1 and ending on December 31, and (2) For the calendar year in which the Company Merger Effective Time occurs, the period beginning on January 1 of such calendar year and ending on the Company Merger Effective Time (the "Short Plan Year"). (s) "Pre-tax Net Earnings" means: (1) For any Plan Year other than the Short Plan Year, the consolidated net earnings (pre-Federal income tax only) of FirstFed Michigan, the Association, and FirstFed Michigan's wholly owned subsidiary corporations after all expenses, charges and losses (including extraordinary items) during such Plan Year, as reported by FirstFed Michigan on and after May 1, 1989, and the Association prior to May 1, 1989, on its audited consolidated statements of operations, plus expenses reflected as a result of this Plan. (2) For the Short Plan Year, the annualized consolidated net earnings (pre-Federal income tax only) of FirstFed Michigan, the Association, and FirstFed Michigan's wholly owned subsidiary corporations after all expenses, charges and losses (including extraordinary items) during such Short Plan Year, as reported by FirstFed Michigan, plus expenses reflected as a result of this Plan, determined through the Company Merger Effective Time based on the value of the Common Stock on the Company Merger Effective Time, but modified as follows: (A) Such consolidated net earnings shall first be adjusted to disregard restructuring or other charges undertaken pursuant to Section 3.14 of the Merger Agreement and to reflect such other adjustments as may be appropriate to reflect the Short Plan Year which are consistent with methodology heretofore utilized by FirstFed Michigan, as contemplated by the Merger Agreement; and (B) The adjusted consolidated net earnings then shall be annualized by dividing such earnings by the number of days between January 1 of -6- 7 the Short Plan Year and the Company Merger Effective Time and multiplying the result by 365 (366 for 1996, if applicable). Pre-tax Net Earnings shall be determined by the Committee based on the financial statements for FirstFed Michigan. (t) "Retirement Plan" means the Retirement Plan for Salaried Employees of First Federal of Michigan. (u) "Total Stockholders' Equity" means for any Plan Year, the amount of total stockholders' equity, including paid-in capital, capital surplus and retained earnings as of December 31 of the preceding Plan Year, as reported by FirstFed Michigan on and after May 1, 1989, and the Association prior to May 1, 1989, on its audited consolidated statements of financial condition. SECTION 3. ELIGIBILITY. (a) ANNUAL AWARDS. Eligibility for participation in Annual Awards shall be limited to those Management Officers whose business decisions, in the judgment of the Committee, will have a significant effect upon the performance of the Association and to such other Management Officers as the Committee may designate. The Committee shall have full and exclusive power to determine the Management Officers who shall be Participants eligible to receive Annual Awards for a Plan Year. The Committee may designate a Management Officer to be a Participant eligible to receive an Annual Award for a Plan Year at -7- 8 any time prior to or during the Plan Year. Any such designation may, in the sole discretion of the Committee, be made retroactive to the 1st day of the Plan Year, or to the 1st day of any month thereafter. Written notice of designation as a Participant eligible to receive an allocation for the Plan Year shall be given to each Management Officer selected as soon as practicable following designation. A Management Officer approved for participation during a given Plan Year shall only be eligible to receive an Annual Award for such Plan Year. Thereafter he shall be considered an inactive Participant unless he is again designated by the Committee to be a Participant eligible to receive an Annual Award for a subsequent Plan Year. At the time an Employee is designated as a Participant, the Committee shall also determine a "Target Percentage" for such Participant, based upon his position with the Association. The Target Percentage shall denote a percentage of the Participant's Compensation during his period of eligibility, which the Participant shall have the potential of earning as an Annual Award. The Committee may change the Target Percentage of a Participant from time to time. In general, whenever practical, Employees who are to be Participants during a Plan Year shall be notified of that fact and of their Target Percentage before December 31 of the preceding Plan Year. -8- 9 Notwithstanding anything herein to the contrary, no Management Officer shall be eligible for an Annual Award for any period after the Company Merger Effective Time. (b) LONG-TERM AWARDS. Eligibility for participation in Long-Term Awards shall be limited to those Management Officers designated by the Committee in its sole discretion who are eligible for an Annual Award under Section 3(a). Notwithstanding anything herein to the contrary, no Management Officer shall be eligible for a Long-Term Award for the Short Plan Year or thereafter. SECTION 4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee which shall have full and exclusive power to interpret the Plan and to adopt such rules and regulations as are necessary for its administration. No Participant shall be a member of the Committee. In the event the members of the Committee are unable to come to a determination of any question, the same shall be determined by the Board of Directors. The Committee may delegate specific responsibilities it assumes under this Plan which are administrative or ministerial in nature by notifying a delegate as to the duties and responsibilities delegated. SECTION 5. COMPUTATION OF THE AWARD FUND. (a) PLAN YEARS PRIOR TO THE SHORT PLAN YEAR. As of the end of each Plan Year prior to the Short Plan Year, the -9- 10 Committee shall establish an Award Fund (which may be zero) to be allocated among Plan Participants as Annual and Long-Term Awards in such Plan Year, pursuant to Section 6. The amount of the Award Fund for the Plan Year shall be an amount determined in the sole discretion of the Committee, which shall not exceed the lesser of: (1) 50% of the aggregate Compensation of all Participants for such Plan Year; or (2) 2% of the amount by which the Pre-tax Net Earnings with respect to such Plan Year are in excess of the product of the Average Treasury Bill Discount Rate for the Plan Year multiplied by Total Stockholders' Equity for such Plan Year. (b) SHORT PLAN YEAR. For the Short Plan Year, the Committee shall establish an Award Fund to be allocated among Plan Participants as Annual Awards in such Plan Year, pursuant to Section 6. The amount of the Award Fund for the Plan Year shall be an amount equal to the lesser of: (1) 50% of the aggregate annualized Compensation of all Participants for the Short Plan Year; or (2) 2% of the amount by which the annualized Pre-tax Net Earnings for the Short Plan Year are in excess of the product of the Average Treasury Bill Discount Rate for the Short Plan Year multiplied by Total Stockholders' Equity for such Plan Year. SECTION 6. MANAGEMENT INCENTIVE AWARDS. If the Pre-tax Net Earnings are sufficient to create an Award Fund, the Committee shall allocate amounts from the Award Fund to provide for Annual Awards, and for Plan Years other than the Short Plan Year, if the total of all Annual Awards is less than the Award -10- 11 Fund, the Committee may allocate amounts from the Award Fund to provide for Long-Term Awards as follows: (a) ANNUAL AWARDS. (1) DETERMINATION OF AWARD. (A) PLAN YEARS OTHER THAN THE SHORT PLAN YEAR. For Plan years other than the Short Plan Year, the Chairman and Chief Executive Officer of the Association (or in the event of his incapacity or other inability to perform, such other Management Officer as the Committee shall designate) will make a recommendation of an Annual Award for each other Participant based on his evaluation of the performance of such Participant. The Committee will then consider the recommendation, evaluate the performance of the Association, its Chairman and Chief Executive Officer and all other Plan Participants and determine an Annual Award from the Award Fund for each Participant, which Annual Award may range from zero to not more than 150% of the Participant's Target Percentage. The Committee shall make such determination as of December 31, 1986, and as of December 31 of each Plan Year thereafter. The Annual Award for each Participant shall be expressed as a percentage of his Compensation. A Participant who terminates his employment during the Plan Year for reasons other than Retirement, Total and Permanent Disability, Early Retirement (as such terms are defined in the Retirement Plan), or death, shall not be considered a Participant designated to receive an allocation of the Award Fund for the Plan Year of his termination. (B) THE SHORT PLAN YEAR. For the Short Plan Year, each Participant will receive a pro rata portion of the Award Fund based on the ratio that his annualized Compensation bears to the annualized Compensation of all Participants. The Annual Award for each Participant shall be determined without regard to any previously determined Target Percentage for the Participant. A Participant who terminates his employment during the Short Plan Year for reasons other than Retirement, Total and Permanent Disability, Early Retirement (as such terms are defined in the Retirement Plan), or death, shall not be considered a Participant designated to receive an allocation of the Award Fund for the Short Plan Year of his termination. -11- 12 (2) PAYMENT OF ANNUAL AWARD. An Annual Award shall become fixed and vested in the Participant immediately upon the Committee's receipt of the Association's final audited financial statements for the Plan Year, or its financial statements for the Short Plan Year, if applicable, with respect to which the Award is made and its final determination of the amount of the Annual Award, if applicable. Except as otherwise provided below, the Annual Award for Plan Years ending after December 31, 1986, shall be paid, in cash, to a Participant in 1 lump sum, within 60 days following the Committee's receipt of the final audited financial statements (the financial statements for the Short Plan Year) of FirstFed Michigan (the Association prior to May 1, 1989), unless the Participant elects on or before the December 31 immediately preceding the Plan Year for which the Annual Award is to be made to the Participant (or, for a person who is not designated to be a Participant until after the commencement of a Plan Year, within 30 days of notification to such person of his designation as a Participant), to have his Annual Award allocated to a Provisional Account under Section 7 hereof and to receive payment of the Annual Award and all interest earned thereon in accordance with 1 of the following 3 deferral alternatives: (A) Payment in 1 lump sum on or about the February 1 which immediately follows the end of the 3rd Plan Year following the Plan Year for which the Annual Award was made; or (B) Payment in 1 lump sum on or about the February 1 of the Plan Year following the Normal Retirement, Early Retirement, Total and Permanent Disability Retirement or termination of employment of the Participant (as such terms are defined in the Retirement Plan); or (C) Payment in annual installments over a period of not more than 15 years as specified by the Participant, such payments to commence on or about the February 1 immediately following the Plan Year of Normal Retirement, Early Retirement, Total and Permanent Disability Retirement or termination of employment of the Participant (as such terms are defined in the Retirement Plan); provided, however, that in no event may any Participant elect to defer the commencement date of his payments under (A), (B) or (C) later than the February 1 of the first Plan Year after the Participant attains age 70. -12- 13 If payment of any Annual Award with respect to Plan Years ending after December 31, 1986, is made in installments, payment of subsequent installments shall be made on or before February 1 of the year in which such payment is due and shall include interest earned on the lowest unpaid balance in that portion of the Participant's Provisional Account related to Annual Awards during the preceding Plan Year at the Annual Rate of Interest being paid on Provisional Accounts for such preceding Plan Year under Section 7 hereof. Anything to the contrary herein notwithstanding, the Committee may require minimum annual installment payments of $500.00. All Annual Awards with respect to Plan Years ending prior to January 1, 1986, which were not forfeited prior to January 1, 1986, pursuant to the provisions of this Plan as then in effect, shall be fully vested in Plan Participants retroactive to January 1, 1986. Prior to January 1, 1988, all vested Annual Awards with respect to Plan Years ending prior to January 1, 1987, shall be payable to Plan Participants in the form and manner set forth in Section 6(a)(2) of this Plan as in effect prior to January 1, 1988, and as elected by the Participant. As soon as administratively feasible on or after January 1, 1988, each Participant's Annual Awards for all Plan Years ending prior to January 1, 1987, shall be paid to the Participant in a lump sum based upon the value of the Annual Award and interest earned thereon as of December 31, 1987. All payments shall be made -13- 14 without regard to any election made by any Participant under the terms of said Plan to defer such amounts to a later date and without regard to the provisions of Section 6(a)(2) of the Plan as previously in effect. Each Participant, prior to receipt of any payment under this Section 6(a)(2), shall waive all rights to receive the amount paid at a later date by execution of a form provided by the Committee. Prior to the Company Merger Effective Time, all vested Annual Awards with respect to Plan Years ending prior to the Company Merger Effective Time, shall be payable to Plan Participants in the form and manner set forth in Section 6(a)(2) of this Plan as in effect prior to January 1, 1995, and as elected by the Participant. As soon as administratively feasible on or after the Company Merger Effective Time, each Participant's Annual Awards for all Plan Years (including the Short Plan Year) ending prior to or on the Company Merger Effective Time, shall be paid to the Participant in a lump sum based upon the value of the Annual Award and interest earned thereon as of the Company Merger Effective Time (as provided in Section 7). All payments shall be made without regard to any election made by any Participant under the terms of said Plan to defer such amounts to a later date and without regard to the provisions of Section 6(a)(2) of the Plan as previously in effect, provided that such Participant, prior to receipt of any payment under this Section 6(a)(2), shall waive all rights to receive the amount paid at a later date by execution of a form provided by the Committee. -14- 15 (b) LONG-TERM AWARDS. (1) DETERMINATION OF AWARD. In any Plan Year, other than the Short Plan Year, in which the Award Fund exceeds the total of all Annual Awards, any part or all of the excess may be allocated as a Long-Term Award by the Committee, in its sole discretion, to any 1 or more of the Plan Participants. Any Long-Term Award to be awarded with respect to a given Plan Year, other than the Short Plan Year, shall be awarded by the Committee prior to March 1 of the subsequent Plan Year. No Long-Term Awards shall be awarded with respect to the Short Plan Year or with respect to any Year occurring thereafter. (2) CONVERSION OF AWARD INTO EQUITY UNITS. When any part of the Award Fund is allocated to a Participant as a Long-Term Award, it will immediately be converted by the Committee into "Equity Units" (including fractions of Units) by dividing the value of the Long-Term Award by the average Market Price of the Common Stock for each of the 4 10-day trading periods (3rd through 12th business days) following the release of the 4 (quarterly or annual) financial statements of FirstFed Michigan (the Association prior to May 1, 1989) for the Plan Year with respect to which the Long-Term Award is granted. Upon conversion of any Long-Term Award into an Equity Unit for the Participant, the Association shall establish an Equity Unit Account in its records for each Participant and shall forthwith make a memorandum credit to each Account to indicate the amount of the Equity Units and the date as of which such Equity Units were granted. (3) PAYMENTS OR FORFEITURE OF LONG-TERM AWARDS. Except as otherwise provided in Section 6(b)(4), if the Participant is employed by the Association at the end of the 3-year period commencing after the Plan Year with respect to which a given Long-Term Award was granted, or if the Participant had terminated employment for reasons of Retirement, Total and Permanent Disability, or Early Retirement (as such terms are defined in the Retirement Plan) prior to expiration of such 3-year period, the value of the Participant's Equity Units with respect to such Long-Term Award shall be paid, in cash, to the Participant, in 1 lump sum, within 30 days following the end of such 3-year period, unless the Participant elected to defer receipt, as hereinafter provided. For purposes hereof, the value of a Participant's Equity Units with respect to each Long-Term Award, means the greater of the amount of the Long- Term Award at the time it was granted, or the sum of: -15- 16 (A) the product of the number of Equity Units in the Participant's Equity Unit Account for such Plan Year, multiplied by the average Market Price of the Common Stock for each of the 4 10-day trading periods (3rd through 12th business days) following the release of the 4 (quarterly or annual) financial statements of FirstFed Michigan (the Association prior to May 1, 1989) for the 3rd Plan Year following the Plan Year for which the Long-Term Award was granted, plus (B) the product of the dividend paid per share on the Common Stock on all dividend dates during said 3- year period multiplied by the number of Equity Units allocable to the Participant under the Long-Term Award. A Participant may elect, on or before the December 31 immediately preceding the Plan Year for which a Long- Term Award may be made to the Participant (or, for a person who is not designated to be a Participant until after the commencement of a Plan Year, within 30 days of notification to such person of his designation as a Participant), but in any event an election may be made at any time prior to December 1, 1986, for any Long-Term Award made for the Plan Year ending December 31, 1986, to have the value of his Equity Units from his Long-Term Award allocated to a Provisional Account under Section 7 hereof within 30 days following the end of the 3-year period, in lieu of receipt of a cash lump sum payment and to receive payment of the Long-Term Award and all dividends allocated to Long-Term Awards in accordance with 1 of the following deferral alternatives: (A) Payment in 1 lump sum on or about the February 1 which immediately following the end of the 3rd Plan Year following the Plan Year in which the allocation to the Provisional Account was made; or (B) Payment in 1 lump sum on or about February 1 of the Plan Year following the Normal Retirement, Early Retirement, Total and Permanent Disability Retirement or termination of employment of the Participant (as such terms are defined in the Retirement Plan); or (C) Payment in annual installments over a period of not more than 15 years, as specified by the Participant, such payments to commence on or about the February 1 immediately following the Plan Year of Normal Retirement, Early Retirement, Total and Permanent Disability Retirement or termination -16- 17 of employment of the Participant (as such terms are defined in the Retirement Plan); provided, however, that in no event may any Participant elect to defer the commencement date of his payments under (A), (B) or (C) later than the February 1 of the 1st Plan Year after the Participant attains age 70. If payment is made in installments, payment of subsequent installments shall be made on or before the February 1 of the year in which such payment is due and shall include interest earned on the lowest unpaid balance in the Participant's Provisional Account during the preceding Plan Year at the Annual Rate of Interest being paid on Provisional Accounts for such preceding Plan Year under Section 7 hereof. Anything to the contrary herein notwithstanding, the Committee may require minimum annual installment payments of $500.00. In the event of the death of the Participant prior to his having served 3 full Plan Years after the end of the Plan Year with respect to which the Long-Term Award was granted (regardless of whether the Participant is then on Retirement, Total and Permanent Disability Retirement or Early Retirement), and in lieu of any other rights to the Long-Term Award under this Plan, the Participant's Beneficiary shall be entitled to receive an amount computed by the Committee equal to the greater of the amount of the Long-Term Award at the time it was granted, or the sum of: (A) the product of the number of Equity Units in the Participant's Equity Unit Account for such Plan Year, multiplied by the average Market Price of the Common Stock for each of the 4 10-day trading periods (3rd through 12th business days) following the release of the 4 (quarterly or annual) financial statements of the Association prior to May 1, 1989, and of FirstFed Michigan on and after May 1, 1989, for the Plan Year preceding the Participant's death, plus (B) the product of the dividend paid per share on the Common Stock on all dividend dates during the period commencing on the first day of the Plan Year following the Plan Year with respect to which the Award was made and ending on the Participant's death, multiplied by the number of Equity Units allocable to the Participant under the Long-Term Award. Except as provided in subparagraph (4) below, a Participant who terminates his employment for any reason not stated above, shall forfeit any Long-Term -17- 18 Award which has not been earned because the Participant failed to serve 3 full Plan Years from the end of the Plan Year with respect to which the Long-Term Award was granted. (4) CHANGE IN STOCK, ADJUSTMENT AND PAYMENT AS OF COMPANY MERGER EFFECTIVE TIME. If there is any distribution of authorized and unissued or treasury shares to the shareholders in the form of a stock dividend or stock split, then the Committee shall make the appropriate adjustment in the quantity and value of the Equity Units to reflect such distribution. If there is any other change from time to time in the number, kind, or par value of the outstanding shares of the Common Stock, or of any stock or the securities into which such Common Stock shall have been changed, or for which it shall have been exchanged, the Committee shall determine whether any adjustment or substitution in the quantity and value of the Equity Units is necessary or appropriate; provided, however, that no adjustment shall be made for any sale by First Federal of Michigan prior to May 1, 1989, or by FirstFed Michigan on or after May 1, 1989, of shares of the Common Stock, including any sale of treasury shares, or for any purchase by First Federal of Michigan prior to May 1, 1989, or by FirstFed Michigan on or after May 1, 1989, of Common Stock as treasury shares. Notwithstanding anything herein to the contrary, as of the Company Merger Effective Time, all Equity Units shall be fully vested in Plan Participants. Each Plan Participant having an Equity Unit shall be paid the value of such Participant's Equity Units (determined as set forth below), in a cash lump sum payment within 60 days after the Company Merger Effective Time. All payments shall be made without regard to any election made by any Participant under the terms of the Plan to defer such amounts to a later date and without regard to the provisions of Section 6(b)(4) of the Plan as previously in effect, provided that such Participant, prior to receipt of any payment under this Section 6(b)(4), shall waive all rights to receive the amount paid at a later date by execution of a form provided by the Committee. Solely for purposes of valuing a Participant's Equity Units under this Section 6(b)(4), the value of an Equity Unit means the greater of the value of the Equity Unit at the time it was granted, or the sum of: (A) the product of the number of Equity Units in the Participant's Equity Unit Account for the Plan Year in which occurs the Company Merger -18- 19 Effective Time, multiplied by the average Market Price of the Common Stock for each of the 4 10-day trading periods (3rd through 12th business days) following the release of the 4 (quarterly or annual) financial statements of FirstFed Michigan for the 4 quarterly periods immediately preceding the Company Merger Effective Time; provided, however, that if the reason for full vesting of a Participant Equity Units hereunder is a tender offer for substantially all of the Common Stock, the number of the Participant's Equity Units shall be multiplied by the tender offer price for the Common Stock, as determined in the sole discretion of the Committee, plus (B) the product of the dividend paid per share on the Common Stock on all dividend dates during the period commencing on the 1st day of the Plan Year following the Plan Year with respect to which the Award was made and ending on the Company Merger Effective Date, multiplied by the number of Equity Units allocable to the Participant under the Long-Term Award. SECTION 7. PROVISIONAL ACCOUNTS. (a) ESTABLISHMENT OF ACCOUNTS. If the Participant is eligible and elects to defer payment of any amount he is entitled to receive in cash, then the Association shall establish a Provisional Account in its records for such Participant and upon allocation of any Annual Award to such Participant under Section 6(a), or upon allocation of a Long-Term Award to the Participant's Provisional Account under Section 6(b)(3) or (4) of the Plan, shall forthwith make a memorandum credit to each such Account to indicate the amount of the Annual Award or Long-Term Award and the date as of which such Annual Award was made or as of which the allocation of a Long-Term Award to a Provisional Account occurred. (b) ALLOCATION OF INTEREST TO PROVISIONAL ACCOUNTS. On or before January 31 of each Plan Year the Committee -19- 20 shall determine an "Annual Rate of Interest" to be earned by Provisional Accounts during such Plan Year. The Annual Rate of Interest so determined by the Committee shall not be more than 1 percentage point above or below First Federal of Michigan's "Cost of Interest Bearing Liabilities" as of December 31 of the preceding Plan Year, as determined by the Treasurer of the Association based upon the audited consolidated financial statements of the Association. As of the last day of the Plan Year (or Short Plan Year), the Association shall compute interest provisionally earned for such Plan Year by multiplying the balance in the Provisional Account of each Participant as of the commencement of such Plan Year by the Annual Rate of Interest for such Plan Year (and for the Short Plan Year by multiplying the result by the number of days in the Short Plan Year and dividing by 365). The interest provisionally earned shall be credited to each Provisional Account. The Provisional Account, including interest earned, plus any addition to the Provisional Account by virtue of an Annual Award made by the Association, or an allocation of a Long-Term Award to a Provisional Account for such Plan Year, shall be deemed to be the Provisional Account of such Participant throughout the following Plan Year for all purposes of this Plan. SECTION 8. DEATH OF A PARTICIPANT. Each Participant may from time to time file a notice designating a Beneficiary to whom the balance of his Provisional Account and the value of his Annual Awards and Long-Term Awards as determined under Section 6 -20- 21 shall be paid in the event of his death. Such notice shall specify the manner in which such benefits are to be paid to the designated Beneficiary, the conditions under which any particular designation shall be effective, and whether payment of the balance of his Provisional Account and the value of his Annual Awards and Long-Term Awards shall be made in a lump sum or in installments to such Beneficiary over a period of not more than 15 years in the manner provided above. If no Beneficiary is designated, such amounts shall be paid to the Participant's legal representative. If no notice as to the time of distribution has been filed, the Committee will pay the balance of the amounts in a lump sum to such Beneficiary. SECTION 9. RIGHTS OF PARTICIPANTS. The Plan shall not in any manner be liable for or subject to or for the debts of any Participant or Beneficiary. No right or benefit at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge or encumbrance of any kind. If a Participant or Beneficiary shall attempt to or shall alienate, sell, transfer, assign, pledge or otherwise encumber his rights or benefits under the Plan or any part thereof or if by reason of his bankruptcy or other event such benefits would otherwise be received by anyone else or would not be enjoyed by him, the Committee in its discretion may terminate his interest in any such benefits and hold or apply such benefit to or for the benefit of such person, his spouse, children or other dependents, or any of them as the Committee shall determine. -21- 22 Neither the establishment of this Plan nor any provisions of the Plan or modifications thereof shall be held or construed as giving any Participant in the Plan the right to be retained in the service of the Association and the Association expressly reserves the right to discharge any Participant whenever the interests of the Association may so require. SECTION 10. REPORTS. As soon as practicable after the close of the Plan Year, each Participant shall receive a report of the status of his Annual Awards, Long-Term Awards and Provisional Account as of December 31 of such year. SECTION 11. NOTICE. Any written notice to the Association required by any of the provisions of this Plan shall be addressed to the Committee and shall become effective when it is received. SECTION 12. REPRESENTATIONS AND WARRANTIES. No Management Officer shall at any time have a right to be selected to be a Participant in the Plan for any year, nor having been selected as a Participant in any year, to continue to be a Participant in any other year, and no person shall have any authority to enter into any agreement assuring such selection or making any warranty or representation with respect thereto. A Management Officer shall have no right to or interest in any Award except as set forth herein. SECTION 13. INDEMNIFICATION. To the extent permitted by applicable law, the Association shall indemnify any person who -22- 23 was or is a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a member of the Committee, against any and all losses, costs, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Association or its shareholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Association or its shareholders and, with respect to any criminal action or proceeding, had reasonable cause to believe his conduct was unlawful. This right of indemnification shall not be deemed exclusive of any other rights to which any Committee member may be entitled as a matter of law or otherwise, to the extent permitted by law. SECTION 14. AMENDMENT AND TERMINATION. The Board of Directors shall have the power to amend the Plan or to terminate the Plan at any time; provided, however, that such power shall not -23- 24 affect the obligation of the Association to pay Awards under the Plan after they have been awarded. Notwithstanding anything herein to the contrary, the Plan is hereby terminated effective as of the Company Merger Effective Time. Subject to any required Participant consent, Awards that are outstanding as of the Company Merger Effective Time shall be paid as soon as administratively feasible after the Company Merger Effective Time to the extent permitted in accordance with the provisions of Sections 6(a)(2) and 6(b)(4), but in no event shall such Awards otherwise be diminished or adversely affected by the termination of this Plan. SECTION 15. GOVERNING LAW. This Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Michigan, where it is made and where it shall be enforced. Any amendment to this Plan shall be valid only if made in the State of Michigan. This amended and restated Plan was adopted and approved by resolution of the Board of Directors of FIRST FEDERAL OF MICHIGAN, dated August 16, 1995. ------------ ATTEST: FIRST FEDERAL OF MICHIGAN W. S. Fambrough By: C. Gene Harling - ---------------------------- -------------------------------------- C. Gene Harling Its: Chairman of the Board, President and ---------------------------------- Chief Executive Officer -24- 25 CERTIFICATION ------------- I, W. Stanley Fambrough , Secretary of FIRST FEDERAL OF MICHIGAN, a corporation having its principal offices in the City of Detroit, Michigan, hereby certify that the above is a true and correct copy of the amended and restated Management Incentive Award Plan as adopted by the Board of Directors of said Association on August 16 , 1995. ----------- IN WITNESS WHEREOF, I have hereunto set my hand and seal this 21st day of August , 1995. ---------------------- W. S. Fambrough ------------------------------------ Secretary -25- EX-10.14 3 EXHIBIT 10.14 1 EXHIBIT 10.14 FIRST FEDERAL OF MICHIGAN SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (As Amended and Restated Effective January 1, 1995) WHEREAS, FIRST FEDERAL OF MICHIGAN, a corporation having its principal offices in the City of Detroit, Michigan (hereinafter referred to as the "Association"), established a Supplemental Executive Retirement Plan (hereinafter referred to as "SERP" or the "Plan"), effective as of December 1, 1984, for certain Management Officers of the Association; and WHEREAS, effective May 1, 1989, the Association was reorganized and pursuant to the Agreement and Plan of Reorganization (the "Agreement") established FirstFed Michigan Corporation, a Michigan corporation, as its parent corporation ("FirstFed Michigan"); and WHEREAS, the Plan was amended and restated effective as of May 1, 1989 and January 1, 1994; and WHEREAS, the Association deems it desirable to further amend and restate the Plan. NOW, THEREFORE, the Association hereby further amends and restates the Plan, effective as of January 1, 1995, as follows: SECTION 1. PURPOSE. The purpose of this Plan is to provide additional retirement benefits which are payable from the general assets of the Association to Participants in the Retirement Plan (prior to January 1, 1994, certain Management Officers of the Association). 2 SECTION 2. DEFINITIONS. Whenever used herein, the following terms shall have the following meanings unless the context requires otherwise: (a) "Association" means First Federal of Michigan and on and after May 1, 1989, FirstFed Michigan, if and to the extent authorized by FirstFed Michigan; provided, however, that whenever this Plan indicates that the "Association" may or shall take any action under the Plan, such action shall be taken by First Federal of Michigan for itself and as agent for FirstFed Michigan. Anything herein to the contrary notwithstanding, in the event of the merger of First Federal of Michigan into any other corporation, such corporation shall succeed to all of the rights and responsibilities of First Federal of Michigan hereunder. (b) "Beneficiary" means the person or persons designated by a Participant who is or may be entitled to a benefit hereunder, or the Participant's legal representatives if no such person is designated. (c) "Board of Directors" means the Board of Directors of the Association. (d) "Charter One" means Charter One Financial, Inc. (e) "Committee" means the Compensation Committee of the Board of Directors; provided, however, that after the Company Merger Effective Time, those persons who were on the Compensation Committee of the Association on the Company Merger -2- 3 Effective Time shall continue to serve as the members of the Compensation Committee until this Plan is terminated and all amounts payable under the Plan are distributed. (f) "Company Merger Effective Time" means the date on which the merger between FirstFed Michigan Corporation and Charter One Financial, Inc. shall become effective, as set forth in Section 1.2 of the Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger by and between FirstFed Michigan and Charter One. (g) "Deferred Compensation Plan" means the First Federal of Michigan Deferred Compensation Plan, if any, as from time to time in effect. (h) "FirstFed Michigan" means FirstFed Michigan Corporation. (i) "Management Officers" means those persons employed by the Association in capacities such as Chairman of the Board of Directors, President, Executive Vice President, Senior Vice President, First Vice President or Vice President of the Association. (j) "MIAP" means the First Federal of Michigan Management Incentive Award Plan, as from time to time amended. (k) "Participant" means: (1) On and after January 1, 1994 and prior to the Company Merger Effective Time, any Participant in -3- 4 the Retirement Plan for Salaried Employees of First Federal of Michigan; and (2) Prior to January 1, 1994, any Management Officer who is designated to be a Participant in the Plan as provided in Section 3 hereof. (l) "Plan" means the First Federal of Michigan Supplemental Executive Retirement Plan, as described herein or hereafter amended. (m) "Profit Sharing Plan" means the First Federal of Michigan Salaried Employees' Profit Sharing Plan, as from time to time amended. (n) "Retirement Plan" means the Retirement Plan for Salaried Employees of First Federal of Michigan, as from time to time amended. SECTION 3. ELIGIBILITY. On and after January 1, 1994 and prior to the Company Merger Effective Time, all Participants in the Retirement Plan shall be eligible to participate in this Plan. Prior to January 1, 1994, eligibility for participation shall be limited to those Management Officers who, in the sole discretion of the Committee, are determined to be Participants eligible to receive Awards for a calendar year under MIAP. If the Committee designates a Management Officer to be a Participant eligible to receive an Award from MIAP at any time other than on the 1st day of the calendar year, then such -4- 5 Participant shall be deemed to be a Participant in this Plan only as of the date designated by the Committee. SECTION 4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee which shall have full and exclusive power to interpret the Plan, to determine the amount and manner of any payments and to adopt such rules and regulations as are necessary for its administration. A member of the Committee who is a Participant shall not vote on any question relating specifically to himself; and, in the event the remaining members of the Committee are unable to come to a determination of any question, the same shall be determined by the Board of Directors. The decisions of the Committee shall be final and conclusive on all persons and the Committee shall not be subject to liability thereon. The Committee may delegate specific responsibilities it assumes under this Plan which are administrative or ministerial in nature by notifying a delegate as to the duties and responsibilities delegated. SECTION 5. BENEFITS. (a) RETIREMENT BENEFITS. Except in the event of termination of this Plan, benefits shall be payable under the Plan only to a Participant who qualifies for a life annuity under the Retirement Plan upon Normal Retirement, Early Retirement, Total and Permanent Disability Retirement or termination of employment, and to his Spouse or designated Beneficiary if such Spouse or designated Beneficiary is paid a survivor annuity under the -5- 6 Retirement Plan. In no event shall any benefits be payable under this Plan under any other circumstances. (b) AMOUNT OF BENEFITS. The amount of the benefit payable under the Plan shall be equal to the excess of: (1) The benefit which would be payable to or on behalf of a Participant under the Retirement Plan (other than Section 13.1(d) thereof) as a life annuity if: (A) The limitations contained in Section 415 of the Internal Revenue Code of 1986, as amended from time to time (the "Code") were inapplicable (other than the limitations relative to lump sum payments in Section 4.2(a)(7)(C) and (D) of the Retirement Plan); (B) The limitation of "$150,000 ($200,000 prior to January 1, 1994), adjusted by the Adjustment Factor" (as defined in the Retirement Plan) on the amount of "Monthly Earnings" and "Compensation" to be taken into account for all Retirement Plan purposes (other than Section 13.1(d) thereof) in any Plan Year were inapplicable; and (C) The Participant's "Monthly Earnings" for any Plan Year under the Retirement Plan included, in addition to any "Monthly Earnings" as defined in the Retirement Plan, the amount of any compensation deferred by the Participant in such Plan Year under the Deferred Compensation Plan without regard to: (i) any amount deferred by the Participant under such Plan solely by reason of the Participant being unable to defer such amount under the Profit Sharing Plan due to the limitations contained in Sections 401(k) and 415 of the Code ("Profit Sharing Deferral Amounts"), (ii) any "Automatic Deferral Amounts" under such Plan, (iii) any "Bonus Deferral Amounts" under such Plan, and (iv) any interest earned on such Profit Sharing Deferral Amounts, Automatic Deferral Amounts and Bonus Deferral Amounts; provided, however, that in determining said Monthly Earning there shall continue to be excluded, (v) the amount of any "Award" to any Participant for such Plan Year under MIAP (but not any interest on any such Award), (vi) any amounts allocated to the -6- 7 Participant under the Profit Sharing Plan for such Plan Year (whether or not the Participant elects a cash payment of such amounts), (vii) any overtime, commissions, or bonuses paid to Participants, and (viii) any amount paid to Participants under the Deferred Compensation Plan. over (2) The benefit actually payable to the Participant as a lifetime annuity under the Retirement Plan (other than any additional benefit payable under Section 13.1(d) thereof). (c) FORM OF BENEFIT PAYMENTS. Unless otherwise elected by a Participant with the consent of his Spouse upon termination of the Plan, the benefit payable to or on behalf of a Participant under Section 5 shall be paid in the form and manner elected by the Participant. If such benefit is payable in the form of a joint and survivor annuity or a pre-retirement spouse's annuity, (1) the provisions of Section 5(b) shall be applied by taking into consideration any adjustment in benefits payable to the Participant under the Retirement Plan by reason of any modification in the application of the Section 5(b)(1)(A) limitations due to the form of benefit elected by the Participant, and (2) the amounts determined by Section 5(b), as so adjusted, shall be converted to the form of benefit elected based upon the same actuarially equivalent factors as used under the Retirement Plan. (d) BENEFITS UPON TERMINATION OF PARTICIPATION. If a Participant ceases to be a Participant in the Retirement Plan (in MIAP prior to January 1, 1994), he shall immediately cease to be a Participant in this Plan. Thereafter, the amounts determined -7- 8 under Section 5(b)(1)(C) for Plan Years prior to and during the Participant's participation in the Plan (but not thereafter) shall be fixed for purposes of determining his benefit under this Plan, but the amounts determined under Section 5(b)(1)(A), 5(b)(1)(B) and 5(b)(2) of this Plan shall continue to be adjusted from time to time in accordance with applicable law and the terms of the Retirement Plan, respectively. (e) BENEFITS UNFUNDED. The benefits under this Plan shall be paid by the Association out of its general assets and shall not be funded in any manner. If the Association shall acquire any assets in connection with the liabilities assumed by it hereunder, it is expressly understood and agreed that no Participant or beneficiary of the Participant shall have any right with respect to, or claim against, such assets. Such assets shall not be held in any way as collateral security for fulfilling the obligations of the Association under this Agreement, and shall be subject to the claims of creditors of the Association. (f) ALLOCATION OF PAYMENTS. In the event FirstFed Michigan elects to participate in this Plan, First Federal of Michigan shall, after consultation with its actuary, determine the actuarial method and assumptions to be used in determining the amount to be contributed by First Federal of Michigan and FirstFed Michigan and when such amounts shall be paid. SECTION 6. RIGHTS OF PARTICIPANTS. The Plan shall not in any manner be liable for or subject to or for the debts of any -8- 9 Participant or Beneficiary. No right or benefit at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge or encumbrance of any kind. If a Participant or beneficiary shall attempt to or shall alienate, sell, transfer, assign, pledge or otherwise encumber his rights or benefits under the Plan or any part thereof or if by reason of his bankruptcy or other event such benefits would otherwise be received by anyone else or would not be enjoyed by him, the Committee in its discretion may terminate his interest in any such benefit and hold or apply such benefit to or for the benefit of such person, his spouse, children or other dependents, or any of them as the Committee shall determine. Neither the establishment of this Plan nor any provisions of the Plan or modifications thereof shall be held or construed as giving any Participant in the Plan the right to be retained in the service of the Association and the Association expressly reserves its right to discharge any such Participant whenever the interests of the Association may so require. SECTION 7. REPRESENTATIONS AND WARRANTIES. No Employee shall at any time have a right to be selected to be a Participant in the Plan for any year, nor having been selected as a Participant in a year, to be a Participant in any other year, and no person shall have any authority to enter into any agreement assuring such selection or making any warranty or representation with respect thereto. -9- 10 SECTION 8. INDEMNIFICATION. To the extent permitted by applicable law, the Association shall indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a member of the Committee, against any and all losses, costs, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Association or its shareholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Association or its shareholders and, with respect to any criminal action or proceeding, had reasonable cause to believe his conduct was unlawful. This right of indemnification shall not be deemed exclusive of any other rights to which any Committee member may be entitled as a matter of law or otherwise, to the extent permitted by law. SECTION 9. AMENDMENT. The Board of Directors shall have the power to amend the Plan or to terminate the Plan at any time; provided, however, that such power shall not affect the obligation -10- 11 of the Association to pay the benefits accrued under the Plan to the extent they have been accrued as of the date of any such amendment or termination. Anything in this Plan to the contrary notwithstanding, effective as of the "Cessation Date" as defined in Section 13.1 of the Retirement Plan, (a) no further benefits shall accrue to any Participant under this Plan; (b) no Participant shall earn any additional Years of Service or Credited Service or have any increase in his Final Average Monthly Earnings taken into account under the Retirement Plan for purposes of determining his accrued benefit under this Plan; (c) no employee who is not a Participant in the Plan on the Cessation Date shall thereafter become a Participant; (d) each Participant who is entitled to a benefit under this Plan as of the Cessation Date shall be fully vested in his benefit under this Plan as of that date; and (e) this Plan shall be terminated. In addition, if as of the Cessation Date the amount of liability for benefits under the Plan as accrued on the books of the Association for accounting purposes is greater than the Actuarially Equivalent (as hereinafter defined) lump sum value of the accrued benefits of all Participants under the Plan, the excess shall be allocated among those Participants in the Plan who are employed by the Association on the Cessation Date, such allocation to be in the ratio that the lump sum value of such Participant's accrued benefit under the Plan bears to the -11- 12 aggregate lump sum value of such accrued benefits under the Plan of all such Participants. For purposes hereof, the Actuarial Equivalent lump sum value of a Participant's benefits shall be determined on the basis of the 1984 Unisex Pension Mortality Table and the interest rate assumption adopted by the Pension Benefit Guarantee Corporation as of August 1, 1995 (for valuation of single employer pension plans not receiving a PBGC Notice of Sufficiency) (a 4.75% immediate annuity rate). As of the Cessation Date, each Participant shall be provided a written notice and a 45-day opportunity to elect, with the consent of his Spouse (if any) by a Qualified Election (consistent with Section 4.5(e)(1) of the Retirement Plan), that the entire present value of his benefits, including any excess amount allocated under this Section 9, shall be distributed to him in the form of an Actuarially Equivalent lump sum. As soon as practical after the Cessation Date, the lump sum value of the benefit payable to any Participant who elects a lump sum payment shall be paid to the Participant. Any Participant who does not elect a lump sum payment within the 45-day period shall be paid his benefit in the form and manner required under Section 5(c) of the Plan, but any excess amount allocated under this Section 9, shall be paid in a lump sum. SECTION 10. GOVERNING LAW. This Plan and all determinations made and actions taken pursuant thereto shall be governed by the laws of the State of Michigan, where it is made -12- 13 and where it shall be enforced. Any amendment to this Plan shall be valid only if made in the State of Michigan. This amended and restated Plan was adopted and approved by resolution of the Board of Directors of FIRST FEDERAL OF MICHIGAN, dated August 16 , 1995. - ---------------------------- ATTEST: FIRST FEDERAL OF MICHIGAN /s/ W. S. Fambrough By: /s/ C. Gene Harling - ----------------------------- -------------------------------- C. Gene Harling Its: Chairman of the Board, President and -------------------------------- Chief Executive Officer CERTIFICATION ------------- I, W. Stanley Fambrough , Secretary of FIRST FEDERAL OF MICHIGAN, a corporation having its principal office in the City of Detroit, Michigan, hereby certify that the above is a true and correct copy of the amended and restated Supplemental Executive Retirement Plan as adopted by the Board of Directors of said Association on August 16 , 1995. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 21st day of August , 1995. - ---- ------------------------- W. S. Fambrough ----------------------------- Secretary -13- EX-10.15 4 EXHIBIT 10.15 1 EXHIBIT 10.15 FIRST FEDERAL OF MICHIGAN EQUITY PERFORMANCE APPRECIATION PLAN (As Amended and Restated Effective January 1, 1995) WHEREAS, FIRST FEDERAL OF MICHIGAN, a capital stock association organized under the Home Owners' Loan Act of the United States of America (the "Association") established the First Federal of Michigan Equity Performance Appreciation Plan (the "Plan"), for certain of its employees effective April 16, 1987; and WHEREAS, effective May 1, 1989, the Association was reorganized and pursuant to a certain Agreement and Plan of Reorganization (the "Agreement"), established FirstFed Michigan Corporation ("FirstFed Michigan"), as its parent corporation; and WHEREAS, the Association amended and restated the Plan effective May 1, 1989, in order to reflect the reorganization and the establishment of FirstFed Michigan as the sole owner of all of the Association's common stock and further amended and restated the Plan effective May 1, 1993; and WHEREAS, the Association wishes to further amend and restate the Plan to reflect the Agreement and Plan of Merger (the "Merger Agreement") between FirstFed Michigan and Charter One Financial, Inc. ("Charter One") effective January 1, 1995, and to terminate the Plan as of the date the merger between FirstFed Michigan and Charter One shall become effective. -1- 2 NOW, THEREFORE, the Association hereby amends and restates the Equity Performance Appreciation Plan, effective as of January 1, 1995, as follows: 1. PURPOSE OF THE PLAN. The purpose of the Plan is to attract and retain the best available personnel for positions of substantial responsibility and to provide additional incentive to certain key employees of the Association or any present or future Parent or Subsidiary of the Association to promote productivity, efficiency of operations, profitability and shareholder value. 2. DEFINITIONS. As used herein, the following definitions shall apply. (a) "Association" means First Federal of Michigan and on and after May 1, 1989, FirstFed Michigan, if and to the extent authorized by FirstFed Michigan; provided, however, that whenever this Plan indicates that the "Association" may or shall take any action under the Plan, such action shall be taken by First Federal of Michigan for itself and as agent for FirstFed Michigan. Notwithstanding anything herein to the contrary, in the event of the merger of FirstFed Michigan into any other corporation, such corporation shall succeed to all of the rights and responsibilities of FirstFed Michigan hereunder. (b) "Board" means the Board of Directors of the Association. (c) "Charter One" means Charter One Financial, Inc. -2- 3 (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means the Compensation Committee appointed by the Board in accordance with paragraph 3(a); provided, however, that after the Company Merger Effective Time, those persons who were on the Compensation Committee of the Association on the Company Merger Effective Time shall continue to serve as the members of the Compensation Committee until this Plan is terminated and all amounts payable with respect to the Rights are distributed. (f) "Common Stock" means: (1) prior to May 1, 1989, the common stock, par value $0.01 per share, of the Association; (2) on and after May 1, 1989, and through the Company Merger Effective Time, the common stock, par value $0.01 per share, of FirstFed Michigan; and (3) after the Company Merger Effective Time, the common stock of Charter One. (g) "Company Merger Effective Time" means the date on which the merger between FirstFed Michigan and Charter One shall become effective, as set forth in Section 1.2 of the Merger Agreement. (h) "Continuous Employment" or "Continuous Status as an Employee" means the absence of any interruption or termination of employment by the Association or any present or -3- 4 future Parent or Subsidiary of the Association. Employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Association or in the case of transfers between payroll locations of the Association or between the Association, its Parent, its Subsidiaries or a successor. (i) "Effective Date" means the date specified in paragraph 18 hereof. (j) "Employee" means any person employed on a full-time basis by the Association or any present or future Parent or Subsidiary of the Association. (k) "FirstFed Michigan" means FirstFed Michigan Corporation. (l) "Participant" means an Employee who receives a Right. (m) "Parent" means any present or future corporation which would be a "parent corporation" as defined in subsections 424(e) and (g) of the Code. (n) "Plan" means the First Federal of Michigan Equity Performance Appreciation Plan. (o) "Right" means an Equity Performance Appreciation Right granted pursuant to the terms of the Plan. (p) "Share" means 1 share of the Common Stock. -4- 5 (q) "Subsidiary" means any present or future corporation which would be a "subsidiary corporation" as defined in subsections 424(f) and (g) of the Code. 3. ADMINISTRATION OF THE PLAN. (a) COMPOSITION OF THE COMMITTEE. The Plan shall be administered by the Compensation Committee of the Board, which shall consist of not less than 3 directors of the Association (as determined from time to time by the Board). All persons designated as members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 of the Securities and Exchange Act of 1934, as amended. (b) POWERS OF THE COMMITTEE. The Committee (to the extent not contrary to the express provisions of the Plan) shall have authority to: (1) designate the Employee to whom Rights may be awarded from time to time; (2) determine the number of Rights to be awarded to each Employee; (3) interpret and construe the Plan, and to adopt, amend or rescind such rules and regulations it shall deem necessary and advisable to implement and administer the Plan; (4) correct any defect or omission or to reconcile any inconsistency in the Plan or in any award granted hereunder; (5) approve the form and terms and conditions of any agreement, as the case may be, between the Association and the Employee; and (6) have and exercise such other power and authority as may be delegated to it by the Board. -5- 6 Such determinations, designations or powers to be made or executed in accordance with the Committee's best business judgment as to the best interests of the Association and its stockholders and in accordance with the purposes of the Plan. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members present at any meeting at which a quorum is present shall be deemed the action of the Committee. Acts approved in writing by a majority of the Committee shall also be deemed the action of the Committee. (c) EFFECT OF THE COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Committee shall be final, conclusive and binding on all persons affected thereby. (d) INDEMNIFICATION. In addition to such other rights of indemnification as they may have, the members of the Committee shall be indemnified by the Association in connection with any claim, action, suit or proceeding relating to any action taken or failure to act under or in connection with the Plan or any Right granted hereunder to the full extent provided for under the Bylaws or Charter with respect to indemnification of directors of the Association. 4. ELIGIBILITY. Rights may be granted to key employees of the Association or any present or future Parent or Subsidiary. Employees who are designated by the Committee as key -6- 7 employees, including officers whether or not Directors of the Association, shall be eligible to receive Rights under the Plan, and an Employee who has been granted a Right may, if otherwise eligible, be granted additional Rights. Notwithstanding anything herein to the contrary, no Employee shall be eligible to receive Rights under the Plan on and after January 1, 1995. 5. GRANT OF RIGHTS. Prior to January 1, 1995, the Committee, may, at any time or from time to time, authorize the granting of Rights. The Committee shall determine and fix in its sole discretion the Employees to whom grants should be made, the number of Rights to be granted to each person eligible to be a Participant, and the terms and conditions under which Rights may be granted. No director who shall hold or be eligible to hold a Right under the Plan shall vote on any action required or permitted to be taken under the Plan by the Committee. Successive Rights may be granted to the same Employee, whether or not the Rights previously granted to such Employee remain unexercised. An Employee may exercise a Right, if then exercisable, notwithstanding that Rights previously granted to such Employee remain unexercised. Notwithstanding anything herein to the contrary, no Rights shall be granted to any Employee under the Plan on or after January 1, 1995. -7- 8 6. WRITTEN AGREEMENT. Each Right shall be evidenced by a written agreement containing such provisions as may be approved by the Committee. Each such written agreement shall constitute a binding contract between the Association and the Employee, and every Employee, upon acceptance of such written agreement, shall be bound by the terms and restrictions of the Plan and of such written agreement. The terms of each such written agreement shall be accordance with the Plan, but each written agreement may include such additional provisions and restrictions determined by the Committee, in its discretion, provided that such additional provisions and restrictions are not inconsistent with the terms of the Plan. The Chairman of the Association and such other officers as shall be designated by the Committee are hereby authorized to execute written agreements evidencing Rights on behalf of the Association and to cause them to be delivered to the Participants. 7. TERM OF PLAN; TERM OF RIGHTS. (a) The Plan shall continue in effect for a term of 10 years from its Effective Date, unless sooner terminated pursuant to paragraph 17. No Right shall be granted under the Plan after 10 years from the Effective Date. (b) The term of each Right granted under the Plan shall be established by the Committee and set forth in the terms of the grant of Rights to the Participant, but shall not exceed 10 years from the date of grant. -8- 9 (c) Notwithstanding anything herein to the contrary, in the event of a change in control of First Federal of Michigan prior or subsequent to May 1, 1989 other than contemplated by the Agreement, or of FirstFed Michigan on or after May 1, 1989, or in the event of a merger between FirstFed Michigan and Charter One, as contemplated by the Merger Agreement, each Participant shall immediately be eligible to exercise all Rights which he has been granted under the Plan regardless of his Years of Continuous Employment after the date of grant of the Rights and the provisions of the grant of Rights which provide for exercise in installments designated by the Committee. The term "control" shall refer to the acquisition by a party or 2 or more related parties acting as a group, within the meaning of Section 13(d) of the Securities Exchange Act of 1934, of more than 25% of the Common Stock of First Federal of Michigan or FirstFed Michigan, as applicable, followed as a result thereof by a change in the Board of Directors of such corporation so that persons who are non-employee directors of such corporation before such change no longer constitute a majority of the non-employee members of the Board of Directors of such corporation. Subject to written consent of a Participant on a form provided by the Committee, each Participant shall be deemed to have exercised all of his rights on the Company Merger Effective Time. 8. NATURE OF RIGHTS. Each Right granted to a Participant shall be used solely as a device for the measurement and determination of the amount to be paid to the Participant under the Plan. A Right shall have no value to a Participant at -9- 10 the time of grant. For purposes of determining the payment to be made to a Participant upon the exercise of a Right, the Participant shall be entitled to receive the appreciation in value, if any, of his Right between the date of grant and the date of exercise measured by determining the value of the Right on the date of exercise and subtracting therefrom the value of the Right on the date of grant to the Participant. For this purpose, each Right shall be deemed to have a value on the date of grant equal to the market value of one share of Common Stock on such date and each Right shall be deemed to have a value on the date of exercise equal to the market value of one share of Common Stock on such date. The measurement of appreciation shall be made separately with respect to each Right. A Right shall not constitute or be treated as property or a trust fund of any kind. If the Common Stock is traded otherwise than on a national securities exchange at the time of valuation of a Right, then the value of a Right shall be not less than the mean between the bid and asked price on the date of valuation or, if there is no bid and asked price on said date, then on the next prior business day on which there was a bid and asked price. If no such bid and asked price is available, then the value per share shall be determined by the Committee. If the Common Stock is listed on a national securities exchange at the time of granting a Right, then the value shall equal the average of the highest and lowest selling price on such exchange on the date such Right is valued or if there were no sales on said date, then the value shall be not less than the mean between the bid and asked price on such date. -10- 11 9. EXERCISE OF RIGHT. (a) PROCEDURE FOR EXERCISE. Any Right granted hereunder shall be exercisable during the term of the Right at such times and under such conditions as shall be permissible under the terms of the Plan and the terms of the grant of Rights to the Participant. A Right granted pursuant to the Plan may be exercised, subject to provisions relative to its termination and limitations on its exercise, from time to time only by written notice of exercise of the Right. Each such notice shall be delivered, or mailed by prepaid registered or certified mail, addressed to the Treasurer of the Association at the Association's executive offices, until the total number of Rights have been exercised or expire. (b) EXERCISE DURING EMPLOYMENT OR FOLLOWING DEATH. Unless otherwise provided in the terms of a grant of Rights, a Right may be exercised by a Participant only while he is an Employee and has maintained Continuous Status as an Employee since the date of the grant of the Right. However, if a Participant who has remained in the employ of the Association or of its Parent or one or more of its Subsidiaries for a period of 6 or more months from the date of a grant, either (1) dies while employed by the Association or its Parent or 1 or more of its Subsidiaries, or (2) retires prior to attaining age 60 under the total and permanent disability retirement provisions of the Association's qualified Retirement Plan, the Participant (or the personal -11- 12 representative of his estate, or his heirs or beneficiaries as described in the Plan, in the event of his death), shall be eligible to exercise all of the Participant's outstanding Rights regardless of his years of Continuous Employment after the date of the grant of the Rights, provided such exercise occurs within 3 months following the date of such retirement for disability or within 12 months following the date of his death, whichever is applicable. If a Participant retires after attaining age 60 with outstanding Rights granted to him, he shall be eligible to exercise all such outstanding Rights provided the Rights were granted to him at least 6 months prior to retirement, he remained in the employ of the Association, its Parent, or 1 or more of its Subsidiaries during such period of time, and such exercise occurs within 3 months following the date of his retirement. The Committee's determination whether a Participant's employment has ceased, and the effective date thereof, shall be final and conclusive on all persons affected thereby. A Participant who is an Employee as of the Company Merger Effective Time shall be eligible to immediately exercise all Rights which he has been granted in accordance with Section 7(c) of this Plan. (c) SETTLEMENT OF RIGHTS. At the time of exercise of a Right, or as soon as administratively feasible thereafter, the Association, or its Parent or Subsidiary which employs the Participant (as applicable), shall pay to the Participant an -12- 13 amount equal to the appreciation in value of the Right, as specified in paragraph 8 hereof. Such payment shall be made in cash. (d) TIME OF EXERCISE. Any election by an Employee or Individual to exercise a Right shall be made during the period beginning on the third business day following the release for publication of quarterly or annual financial information and ending on the twelfth business day following such date, except, that if a Participant consents to exercise of a Right under Section 7(c), exercise shall be deemed to occur on the Company Merger Effective Time. This condition shall be deemed to be satisfied when the specified financial data is first made publicly available. 10. NON-TRANSFERABILITY OF RIGHTS. Rights granted under the Plan may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution. A Right may be exercised, during the lifetime of the Participant, only by the Participant in accordance with paragraph 9. 11. EFFECT OF CHANGE IN COMMON STOCK OF THE ASSOCIATION. In the event that each of the outstanding shares of Common Stock (other than shares held by dissenting shareholders) shall be changed into or exchanged for a different number or kind of shares of stock of the Association, FirstFed Michigan, or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, stock dividend, split-up, -13- 14 combination of shares, or otherwise), then the number of Rights of a Participant shall be adjusted in the same manner as shares of the Common Stock reflected by such Rights would be adjusted. In the event there shall be any other change in the number of, or kind of, issued shares of Common Stock, or of any stock or other securities into which such Common Stock shall have been changed, or for which it shall have been exchanged, then if the Committee shall, in its sole discretion, determine that such change equitably requires an adjustment in the number, or kind, or value of the Rights, such adjustment shall be made by the Committee and shall be effective and binding for all purposes of the Plan. Notwithstanding anything in this Plan to the contrary, effective May 1, 1989, each Right relating to a share of Common Stock of the Association automatically will be converted into an identical Right, with identical values, terms and conditions, relating to a share of common stock of FirstFed Michigan. Notwithstanding anything in this Plan to the contrary, effective as of the Company Merger Effective Time, each Right relating to a share of Common Stock of FirstFed Michigan automatically will be converted into a Right, with identical terms and conditions, relating to 1.2 shares of Common Stock of Charter One. -14- 15 12. TIME OF GRANTING RIGHTS. The date of grant of a Right under the Plan shall, for all purposes, be the date on which the Committee makes a determination to grant such Right. Notice of the determination shall be given to each Employee to whom a Right is so granted within a reasonable time after the date of such grant. 13. RIGHT TO CONTINUED EMPLOYMENT. Neither the establishment of this Plan nor any provisions of the Plan or modifications thereof shall be held or construed as giving any Employee in the Plan the right to be retained in the service of the Association, its Parent or a Subsidiary and the Association expressly reserves the right to discharge any Employee, with or without cause, whenever the interests of the Association may so require. 14. MODIFICATION OF RIGHTS. At any time and from time to time the Committee may direct execution of an instrument providing for the modification of any outstanding Right, provided no such modification, extension or renewal shall confer on the holder of said Right any right or benefit which could not be conferred on him by the grant of a new Right at such time, or impair the Right without the consent of the holder of the Right. 15. WITHHOLDING PAYMENTS. If upon the exercise of a Right, there shall be payable by the Association or a Parent or a Subsidiary any amount for income tax withholding, the Association shall reduce the amount of cash to be delivered or paid to the individual to reflect the required withholding payments. The -15- 16 Committee may make such other arrangements with respect to income tax withholding as it shall determine. 16. USE OF WORDS. As used herein, the use of any gender shall include all genders. 17. AMENDMENT AND TERMINATION OF THE PLAN. The Board may alter, suspend or discontinue the Plan except that no action of the Board may reduce the value of any Right at the time of grant. No action of the Board or of the Committee may, without the consent of the holder of the Right, impair any then outstanding Right. Notwithstanding anything herein to the contrary, the Plan is hereby terminated, effective as of the Company Merger Effective Time. Rights that are outstanding as of the Company Merger Effective Time shall not be diminished or otherwise adversely affected by the termination of this Plan and an Employee may exercise any such Rights as of the Company Merger Effective Time in accordance with Section 7(c) of the Plan or thereafter in accordance with the terms of the Plan. 18. EFFECTIVE DATE. The Plan became effective upon approval by a majority of the members of the Board of Directors of the Association which occurred on April 16, 1987. -16- 17 This amended and restated Plan was adopted and approved by the Association this 16th day of August , 1995. ---- ------------------ ATTEST: FIRST FEDERAL OF MICHIGAN W. S. Fambrough By: C. Gene Harling - ---------------------------- --------------------------------------- Secretary C. Gene Harling Its:Chairman of the Board, President and -------------------------------- Chief Executive Officer -17- 18 CERTIFICATE ----------- The undersigned hereby certifies that he is the duly elected and qualified Secretary of FIRST FEDERAL OF MICHIGAN, a Michigan corporation (the "Association"), and further certifies that the following resolutions were duly adopted by the Board of Directors of the Association on August 16, 1995, and that such resolutions are in full force and effect as of the date of this Certificate. WHEREAS, the First Federal of Michigan Equity Performance Appreciation Plan (the "Plan") was amended and restated effective May 1, 1993 and the Association desires to further amend the restate the Plan, to cease issuance of new Rights under the Plan, and to terminate the Plan. NOW, THEREFORE, BE IT RESOLVED, that the Plan, as amended and restated effective January 1, 1995, is hereby adopted and approved in the form presented at the meeting; and RESOLVED, that no further Rights shall be issued under the Plan on or after January 1, 1995, the Plan shall be terminated, and all outstanding Rights shall be paid in accordance with the terms of the amended Plan. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal of this Association this 21st day of August , 1995. ---- -------------------- W. S. Fambrough ------------------------------------- Secretary EX-10.17 5 EXHIBIT 10.17 1 EXHIBIT 10.17 RETIREMENT PLAN FOR SALARIED EMPLOYEES -------------------------------------- OF -- FIRST FEDERAL OF MICHIGAN ------------------------- (As Amended and Restated Effective January 1, 1995) 2 RETIREMENT PLAN FOR SALARIED EMPLOYEES -------------------------------------- OF FIRST FEDERAL OF MICHIGAN ------------------------- (As Amended and Restated Effective January 1, 1995) TABLE OF CONTENTS -----------------
ARTICLE SECTION PAGE - ------- ------- ---- I DEFINITIONS................................ 2 II ELIGIBILITY................................ 22 2.1 Coverage Prior to January 1, 1976.......... 22 2.2 Coverage On and After January 1, 1976...... 22 2.3 Suspension of Coverage..................... 22 2.4 Determination of Eligibility............... 23 2.5 Leased Employees........................... 23 III RETIREMENT DATES........................... 24 3.1 Normal Retirement Date..................... 24 3.2 Deferred Retirement Date................... 24 3.3 Early Retirement Date...................... 25 3.4 Disability Retirement Date................. 25 IV RETIREMENT BENEFITS........................ 25 4.1 Retired Employees on January 1, 1976....... 25 4.2 Normal Retirement Benefit.................. 26 4.3 Early Retirement Benefit................... 33 4.4 Total and Permanent Disability Retirement Benefit......................... 34 4.5 Retirement Benefit Payments................ 39 4.6 Employee Contributions..................... 44 V TERMINATION OF EMPLOYMENT AND DEATH........ 45 5.1 Termination Of Employment.................. 45 5.2 Death Benefits............................. 47 VI YEARS OF SERVICE AND CREDITED SERVICE...... 51 6.1 Service Credited Under the Plan............ 51 6.2 Loss of Credited Service................... 52 6.3 Rehires.................................... 54 6.4 Reemployment After Retirement.............. 55 VII RETIREMENT BENEFIT PAYMENTS................ 55 7.1 Application................................ 55 7.2 Appeal to Pension Committee................ 56 7.3 Commencement and Duration of Payments...... 56 7.4 Employment After Retirement or Termination. 59 7.5 Employees Not Actively at Work............. 64
-i- 3 RETIREMENT PLAN FOR SALARIED EMPLOYEES -------------------------------------- OF -- FIRST FEDERAL OF MICHIGAN ------------------------- (As Amended and Restated Effective January 1, 1995) TABLE OF CONTENTS ----------------- (CONTINUED)
ARTICLE SECTION PAGE - ------- ------- ---- 7.6 Notification of Address.................... 64 7.7 Unclaimed Benefits......................... 64 7.8 Qualified Domestic Relations Orders........ 65 7.9 Limitations on Distributions............... 67 7.10 Eligible Rollover Distributions............ 73 VIII TOP HEAVY PROVISIONS....................... 75 8.1 Minimum Vesting............................ 75 8.2 Minimum Benefit............................ 76 8.3 Impact Upon Maximum Benefits............... 77 8.4 Top Heavy Plan Defined..................... 77 IX FINANCING.................................. 82 9.1 Fund....................................... 82 9.2 Association Contributions.................. 82 9.3 Employee Contributions..................... 83 9.4 Irrevocability............................. 83 X ADMINISTRATION............................. 83 10.1 Responsibility for Administration.......... 83 10.2 Function of the Committee.................. 84 10.3 Limitation of Liability.................... 86 XI MISCELLANEOUS PROVISIONS................... 86 11.1 Right of Association....................... 86 11.2 Facility of Payment........................ 86 11.3 Non-Alienation of Benefits................. 87 11.4 Evidence of Survival....................... 87 11.5 Beneficiary................................ 88 11.6 Modification in Mode of Payment............ 88 XII AMENDMENT.................................. 91 12.1 Right to Amend............................. 91 12.2 Non-Diversion of Assets.................... 93 12.3 Merger of Plan............................. 94 XIII TERMINATION OF THE PLAN.................... 94 13.1 General.................................... 94 13.2 Provisions for Highly Compensated Employees.................................. 103 13.3 Termination With Respect to One Employer................................... 107
-ii- 4 RETIREMENT PLAN FOR SALARIED EMPLOYEES -------------------------------------- OF -- FIRST FEDERAL OF MICHIGAN ------------------------- (As Amended and Restated Effective January 1, 1995) TABLE OF CONTENTS ----------------- (CONTINUED)
ARTICLE SECTION PAGE - ------- ------- ---- XIV EMPLOYEES TRANSFERRED FROM FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OWOSSO EMPLOYEES' PENSION TRUST................... 107 14.1 Eligibility of Employees................... 107 14.2 Procedure for Effectuating Rollovers....... 108 14.3 Crediting of Amount Transferred............ 108 14.4 Credit for Service......................... 119 14.5 Retirement and Death Benefits.............. 110 14.6 Termination of Plan........................ 115 XV EMPLOYEES TRANSFERRED FROM KALAMAZOO SAVINGS AND LOAN ASSOCIATION PENSION PLAN....................................... 115 15.1 Merger With Kalamazoo Savings and Loan Association Pension Plan................... 115 15.2 Assets of the Kalamazoo Plan............... 116 15.3 Eligibility of Employees................... 117 15.4 Credit for Service......................... 117 15.5 Retirement and Death Benefits.............. 118 15.6 Benefits of Participants Who Terminated Prior to October 1, 1981................... 124 15.7 Special Provisions Applicable to Merger.... 124 15.8 Supplementary Action....................... 125 XVI EMPLOYEES TRANSFERRED FROM KENTWOOD SAVINGS AND LOAN ASSOCIATION............... 126 XVII MERGER WITH THE OMNI SAVINGS BANK, FSB EMPLOYEES' RETIREMENT PLAN................. 127 17.1 Merger with Omni Savings Bank, FSB Employees' Retirement Plan................. 127 17.2 Special Provisions Applicable to Merger.... 127 17.3 Supplementary Action....................... 128 XVIII MERGER WITH BAY SAVINGS BANK, FSB EMPLOYEES' RETIREMENT PLAN................. 129 18.1 Merger with Bay Savings Bank, FSB Employees' Retirement Plan............................ 129 18.2 Special Provisions Applicable to Merger.... 130 18.3 Supplementary Action....................... 130 XIX GOVERNING LAW.............................. 131
-iii- 5 RETIREMENT PLAN FOR SALARIED EMPLOYEES -------------------------------------- OF -- FIRST FEDERAL OF MICHIGAN ------------------------- (As Amended and Restated Effective January 1, 1995) WHEREAS, First Federal of Michigan (formerly First Federal Savings and Loan Association of Detroit), established, effective November 1, 1947, a Retirement Plan; and WHEREAS, said Plan has been amended and restated from time to time and was redesignated the Retirement Plan for Salaried Employees of First Federal Savings and Loan Association of Detroit; and WHEREAS, the Plan was further amended and restated effective January 1, 1980, and further amended and restated effective October 1, 1981, January 1, 1982, January 1, 1983, January 1, 1984, January 1, 1987, January 1, 1992, on 2 occasions on January 1, 1993 and on January 1, 1995; and WHEREAS, in accordance with Section 12.1, of the Plan, First Federal of Michigan reserved the right at any time to amend the Retirement Plan. NOW, THEREFORE, the Retirement Plan for Salaried Employees of First Federal of Michigan is further amended and restated in its entirety as hereinafter set forth, effective as of January 1, 1995. 6 ARTICLE I --------- DEFINITIONS ----------- 1.1 "Accrued Benefit" means the benefit calculated under Section 4.2 or Section 8.2 based on Credited Service, Final Average Monthly Earnings and benefit levels in effect as of the date of the determination and payable in the Normal Form for an unmarried Employee as provided in Section 4.5 commencing on the Employee's Normal Retirement Date. 1.2 "Accumulated Contributions" means a Covered Employee's contributions plus interest thereon computed from the date such contributions are made to the date the Employee retires or terminates employment, determined as follows: (a) for the period prior to January 1, 1976, in accordance with the terms of the Plan as in effect prior to January 1, 1976; plus (b) 5% interest compounded annually on such amount from January 1, 1976 to December 31, 1978; plus (c) 7% interest compounded annually on such amount from January 1, 1979 to December 31, 1981; plus (d) 9% interest compounded annually on such amount from January 1, 1982 to December 31, 1993; plus (e) interest compounded annually on such amount on and after January 1, 1994 at an annual rate of interest each Plan Year equal to the Association's Cost of Interest Bearing -2- 7 Liabilities (rounded to the nearest 1/100 of 1%) as of December 31 of the immediately preceding Plan Year as set forth in the audited consolidated financial statements of the Association for such Plan Year. 1.3 "Actuarial Equivalent" means a benefit having the same value as the benefit which such "Actuarial Equivalent" replaces. Whenever a specific definition of an Actuarial Equivalent is not set forth herein, it shall be computed on the basis of the 1984 Unisex Pension Mortality Table at an interest rate of 7% per annum. 1.4 "Adjustment Factor" means the cost of living adjustment factor prescribed by the Secretary of Treasury under Section 401(a)(17) or Section 415(d), as applicable, of the Code for years beginning after December 31, 1987, applied to such items in such manner as the Secretary shall prescribe. 1.5 "Anniversary Date" means January 1 of each year. 1.6 "Association" means First Federal of Michigan (known as First Federal Savings and Loan Association of Detroit prior to September 1, 1982), and its wholly owned subsidiary, 1001 Services, Inc. Effective as of the date of adoption of this Plan and Trust by any Participating Company as set forth below, the term "Association" also means and includes any such Participating Company; provided, however, that whenever the Trust Agreement indicates that the "Association" may or shall take any action under the Trust, such action shall be taken by First Federal of -3- 8 Michigan for itself and as agent for any such Participating Company. The term "Participating Company" means any corporation which is classified by the Board of Directors of First Federal of Michigan as a Participating Company for purposes of this Plan and Trust, and which, with the approval of the Board of Directors of First Federal of Michigan, elects to become a party hereto by adopting the Plan and Trust for the benefit of its employees by resolution of its Board of Directors. The Employees of any Participating Company shall not be granted any credit for Years of Service or Credited Service prior to the Participating Company's election to become a party hereto, except to the extent authorized and approved by the Board of Directors of the Association. As evidence of its adoption of the Plan and Trust, the Participating Company shall file certified copies of said resolution with First Federal of Michigan, and First Federal of Michigan shall file 2 copies thereof, together with 2 certified copies of its own Board of Directors' resolution approving such participation, with the Trustee hereunder who shall acknowledge receipt thereon and return 1 copy to First Federal of Michigan. In all dealings with the Trustee, First Federal of Michigan shall act as agent for any Participating Company. Anything herein to the contrary notwithstanding, in the event of the merger of First Federal of Michigan into any other corporation, such corporation shall succeed to all of the rights and responsibilities of First Federal of Michigan hereunder. 1.7 "Charter One" means Charter One Financial, Inc., a Delaware corporation. -4- 9 1.8 "Code" means the Internal Revenue Code of 1986 as now or hereafter amended. 1.9 "Committee" means the Pension Committee established in accordance with Article X of the Plan. 1.10 "Company Merger Effective Time" means the date on which the merger between FirstFed Michigan Corporation and Charter One Financial, Inc. shall become effective, as set forth in Section 1.2 of the Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger by and between FirstFed Michigan and Charter One. 1.11 "Compensation" means all taxable amounts received by the Employee from the Association and Related and Predecessor Companies which are defined as compensation in Section 1.415-2(d) of the Regulations under the Code, including an Employee's earned income, wages, salaries, and fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Association (commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, and bonuses), and excluding the following: (a) Association contributions to a plan of deferred compensation which are not included in the Employee's gross income for the taxable year in which contributed or Association contributions under a simplified employee pension plan -5- 10 to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which received special tax benefits, or contributions made by the Association (whether or not under a salary reduction agreement) towards the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludible from the gross income of the employee). Compensation for any Limitation Year is the compensation actually paid or includible in gross income during such year. Anything herein to the contrary notwithstanding, however, for Plan Years beginning prior to January 1, 1989 if the Plan is Top Heavy and for Plan Years beginning on or after January 1, 1989, the annual Compensation of each Employee to be taken into account under the Plan shall not exceed $150,000 ($200,000 prior to January 1, 1994), as adjusted by the Adjustment Factor. In determining the compensation of an Employee for purposes of this limitation, the family aggregation rules of -6- 11 Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Employee and any lineal descendants of the Employee who have not attained age 19 before the close of the year. If, as a result of the application of such rules, the adjusted $150,000 ($200,000 prior to January 1, 1994) limitation is exceeded, then the limitation shall be prorated among the affected individuals' Compensation determined under this Section 1.09 prior to the application of this limitation. 1.12 "Computation Year" means a 12-consecutive-month period commencing with an employee's employment commencement date (the date the employee completes his first Hour of Service with the Association) or his Reemployment Commencement Date, if applicable, and each 12-month period thereafter. 1.13 "Covered Employee" means an Employee who has met the eligibility requirements of Article II and is covered under the Plan. 1.14 "Credited Service" means the service credited in accordance with Section 6.1 of the Plan for purposes of determining: (a) the amount of a Covered Employee's retirement benefit in accordance with Article IV, and (b) after December 31, 1980, his eligibility for a Disability Retirement Benefit in accordance with Section 3.4. 1.15 "Current Accrued Benefit" means an Employee's Accrued Benefit under the Plan, determined as if the Employee had -7- 12 separated from service as of the close of the last Limitation Year beginning before January 1, 1987, when expressed as an annual benefit within the meaning of Section 415(b)(2) of the Code. In determining the amount of an Employee's Current Accrued Benefit, the following shall be disregarded: (a) any change in the terms and conditions of the Plan after May 5, 1986; and (b) any cost of living adjustment occurring after May 5, 1986. 1.16 "Defined Benefit Dollar Limitation" means the limitation set forth in Section 415(b)(1) of the Code, as described in Section 4.2 hereof. 1.17 "Defined Contribution Dollar Limitation" means the Defined Benefit Dollar Limitation in effect for the Limitation Year under Section 415(c)(1)(A) of the Code (determined without regard to Section 415(c)(6)) as adjusted by the Adjustment Factor. 1.18 "Effective Date" means November 1, 1947. 1.19 "Employee" means any salaried person employed by the Association, excluding (a) any person who does not have at least 1 Hour of Service on or after January 1, 1988, if his last date of hire by the Association was on or after his 60th birthday, unless at such date of hire he was entitled to a reinstatement of his Years -8- 13 of Service and Credited Service in accordance with Article VI of the Plan; (b) any person principally employed at the Bay Savings Division of First Federal; (c) any person covered by a collective bargaining agreement in which no specific provision is made for eligibility and participation under this Plan (participation in this Plan being in such instance a subject for collective bargaining like wages, hours and other terms and conditions of employment); and (d) any Leased Employees (as defined in Section 2.5), unless such Leased Employees constitute more than 20% of the Association's nonhighly compensated workforce within the meaning of Code Section 414(n)(5)(C)(ii). 1.20 "ERISA" means the Employee Retirement Income Security Act of 1974, as now in effect or hereafter amended. 1.21 "Final Average Monthly Earnings" means the highest average of a Covered Employee's Monthly Earnings while a salaried Employee of the Association in any 60 consecutive calendar month period preceding the earlier of: (a) the date of his retirement (his Early Retirement Date, if any, otherwise his Normal Retirement Date, or, for Employees with at least 1 Hour of Service on or after January 1, 1988, his Deferred Retirement Date), (b) the date of his last Break in Service, or (c) the date of the termination of the Plan. -9- 14 1.22 "Fund" means the Fund established by payments made in accordance with Article IX of the Plan. 1.23 "Highly Compensated Employee" means any highly compensated active employee and highly compensated former employee determined pursuant to the calendar year calculation election provided in Regulation Section 1.414(q)-1T, A-14(b) under the Code. A highly compensated active employee means any employee who performs service for the Association during the Plan Year and who during the Plan Year (a) receives compensation from the Association in excess of $75,000 (multiplied by the Adjustment Factor); (b) receives compensation from the Association in excess of $50,000 (multiplied by the Adjustment Factor) and was a member of the "top paid group" for such year (within the meaning of Regulation Section 1.414(q)-1T, A-9); (c) was an "includible" officer of the Association (within the meaning of Regulation Section 1.414(q)-1T, A-10) and received compensation during such Plan Year that is greater than 50% of the dollar limitation in effect under Section 415(b)(1)(A) of the Code; or (d) at any time is a 5% owner (within the meaning of Regulation Section 1.414(q)-1T, A-8). If no officer has satisfied the compensation requirement of (c) during the Plan Year, the highest paid officer for such year shall be treated as a Highly Compensated Employee. No more than 50 Employees (or, if lesser, the greater of 3 Employees or 10% of the Employees without regard to any exclusions) shall be treated as officers. -10- 15 A highly compensated former employee includes any employee who is separated from service (or was deemed to have separated from service) prior to the Plan Year, performs no service for the Association during the Plan Year, and was a highly compensated active employee for either the separation year or any Plan Year ending on or after the employee's 55th birthday. If an employee is, during the Plan Year, a family member of either a 5% owner who is an active or former employee or a Highly Compensated Employee who was 1 of the 10 most highly compensated employees ranked on the basis of Compensation paid by the Association during such year, then the family member and the 5% owner or top-10 highly compensated employee shall be aggregated. In such case, the family member and 5% owner or top-10 highly compensated employee shall be treated as a single employee receiving compensation and plan contributions or benefits equal to the sum of such compensation, contributions or benefits of the family member and 5% owner or top-10 highly compensated employee. For purposes of this section, family member includes the spouse, lineal ascendants and descendants of the employee or former employee and the spouses of such lineal ascendants and descendants. For purposes of determining Highly Compensated Employees, Compensation includes elective or salary reduction contributions to a cafeteria plan, cash or deferred arrangement or tax sheltered annuity. -11- 16 1.24 "Hour(s) of Service" means: (a) For purposes of determining Credited Service, Years of Service and Break in Service: (1) An Hour of Service is each hour for which an Employee is paid or entitled to payment by the Association, as an Employee, for the performance of duties during the applicable computation period. Hours of Service shall be credited to Employees for the applicable computation period or periods during which the duties are performed. Credit shall be given for the hours worked irrespective of whether at straight time or premium pay. (2) An Hour of Service is each hour for which an Employee is paid, or entitled to payment by the Association, on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, leave of absence or otherwise. Notwithstanding the preceding sentence: (A) An hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable unemployment compensation or disability insurance laws; and (B) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. (C) Effective on and after January 1, 1993, no more than 501 Hours of Service shall be credited under this paragraph (2) to an Employee on account of any single continuous period during which the Employee performs no duties. For purposes of this paragraph (2), a payment shall be deemed to be made by or due from the Association, regardless of whether such payment is made by or due from the Association directly, or indirectly through, among others, a trust fund or insurance company, to which the Association contributes or pays premiums and regardless of whether contributions made by or due to the trust -12- 17 fund, insurer or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. Hours of Service credited hereunder on account of a payment calculated on the basis of units of time, such as hours, days, weeks or months, shall be credited to the computation period or periods in which occurs the period when no duties are performed, beginning with the first unit of time to which the payment relates. If payment is not calculated on the basis of units of time, these hours shall be credited to the computation period during which no duties are performed, or if the period during which no duties are performed extends beyond 1 computation period, such hours shall be allocated, as determined by the Committee, between such computation periods when no duties are performed on any reasonable basis consistently applied to all Employees within the same job classification. (3) An Hour of Service is each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Association. Crediting of Hours of Service for back pay awarded or agreed to with respect to periods described in paragraph (2) shall be subject to the limitations set forth in that paragraph. These Hours of Service shall be credited to the computation period or periods to which the award or agreement pertains; provided, however, that the Committee, in its sole discretion but acting consistently for all Employees within the same job classification, may, with respect to a period of not more than 31 days which extends beyond 1 computation period, credit all hours to the first computation period or the second computation period. (4) For purposes of construing paragraphs (2) and (3) hereof, the special rules for determining Hours of Service for reasons other than the performance of duties as set forth in 29 C.F.R., Part 2530, Subsection 2530.200 b-2(b), are by this reference incorporated herein. (5) Employees (A) whose compensation is not determined on the basis of specified amounts for each Hour of Service worked during a given period, (B) whose hours are not required to be counted and recorded by any federal law, and (C) whose hours are not specifically counted and recorded by the Association shall be credited with Hours of Service at the rate of 45 Hours of Service for each weekly period during which they would otherwise be credited with at least 1 Hour of Service hereunder. (6) Solely in determining whether an Employee has incurred a Break in Service for purposes of eligibility to participate and vesting, any period of -13- 18 unpaid leave of absence which is considered an "FMLA leave" under regulations issued pursuant to the Family and Medical Leave Act of 1993 shall not be treated as or counted toward a Break in Service. No Hours of Service shall be counted during any period of unpaid FMLA leave for purposes of determining an Employee's Years of Service or Credited Service. (b) Solely for the purpose of determining an Employee's Years of Service and Break in Service, an Hour of Service shall, in addition, mean each Hour of Service (within the meaning of Section 1.22(a) hereof) with Related or Predecessor Companies, other than as an "Employee" as defined in this Plan. (c) In the event there are insufficient records documenting Hours of Service completed by one or more Employees prior to January 1, 1976, the Committee may use for the purpose of determining such Hours of Service whatever records are reasonably acceptable to it and may make whatever calculations are necessary to determine the approximate Hours of Service completed during such prior period or periods. (d) Anything to the contrary herein notwithstanding, for all purposes under the Plan, an Employee entitled to credit for an Hour of Service under any 1 of the provisions of Section 1.22 hereof shall not be entitled to additional credit for the same Hour of Service under any other provision of Section 1.22. (e) Solely for purposes of determining whether a Break in Service has occurred for participation and vesting purposes in a Plan Year occurring on or after January 1, 1985, an -14- 19 individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such Hours cannot be determined, 8 Hours of Service per day of such absence; provided, however, that the total number of hours treated as Hours of Service by reason of any such maternity or paternity shall not exceed 501 hours. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of an individual, (2) by reason of a birth of a child of the individual; (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (1) in the Plan Year in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or (2) in all other cases, in the following Plan Year. No credit will be given pursuant hereto unless the Employee furnishes to the Committee such timely information as the Plan may reasonably require to establish that the absence from work is for reasons referred to above and the number of days for which there was such absence. 1.25 "Key Employee" means an employee, former employee or beneficiary of such employee in the Plan who, at any time during the Plan Year or any of the 4 preceding Plan Years, is any of the following: -15- 20 (a) An officer of the Association; provided, however, that for purposes hereof, no more than 50 Employees of the Association (or, if fewer, the greater of 3 Employees or 10% of all Employees) shall be treated as officers of the Association and, provided, further, that if there are more than 50 officers who are considered Key Employees under this test, only those 50 who had the highest 1-year compensation in the 5-year period ending on the last day of the Plan Year of the determination shall be considered Key Employees; and provided further that no officer shall be considered a Key Employee if his annual compensation does not exceed 50% of the maximum dollar limitation under Section 415(b)(1)(A) of the Code. (b) 1 of the 10 employees owning (or considered as owning within the meaning of Code Section 318) both more than a 1/2% interest and the largest interests in the Association and all Related Companies; provided, however, that an employee shall not be considered a Key Employee if he earns less annual compensation from the Employer and all Related Companies than the maximum dollar limitation under Code Section 415(c)(1)(A) in effect for the calendar year in which the Determination Date falls; and provided further that if 2 employees have the same interest, the employee having greater annual compensation shall be treated as having a larger interest. (c) A 5% owner of the outstanding stock or voting power of all stock of the Association or any Related Company (or of the capital or profit interest in the Related Company); or -16- 21 (d) A 1% owner of the outstanding stock or voting power of all stock of the Association or any Related Company (or of the capital or profit interest in the Related Company) and has annual earnings from the Association and any Related Company of more than $150,000. For purposes of (b), (c), and (d), subparagraph (C) of Code Section 318(a)(2) shall be applied by substituting 5% for 50%, in the case of any Related Company which is not a corporation, ownership shall be determined in accordance with Regulations issued pursuant to Code Section 416(i)(1)(B)(iii)(II) and the rules of subsection (b), (c) and (m) of Section 414 shall not apply in determining ownership in the Association or any Related Company. Further, in determining the distributions during the last 5 years to be taken into account hereunder, the foregoing shall also apply to distributions under a terminated plan which if it had not terminated would have been required to be included in an Aggregation Group as defined herein. 1.26 "Limitation Year" means the Plan Year. 1.27 "Minimum Benefit Service" means all of an Employee's Years of Service under the Plan, except that the following shall be disregarded: (a) Years of Service before age 18; (b) Years of Service during any period for which the Association did not maintain the Plan or a predecessor plan -17- 22 (as defined under Regulations prescribed by the Internal Revenue Service); (c) Years of Service lost under the Break in Service rules of Section 6.2 of the Plan; (d) Any Year of Service if the Plan was not a Top Heavy Plan for such Plan Year, or such Year of Service was completed in a Plan Year beginning before January 1, 1984. 1.28 "Monthly Earnings" means a Covered Employee's monthly basic rate of earnings for any calendar month, exclusive of overtime, commissions, bonuses and earnings while not an Employee of the Association. For Plan Years beginning prior to January 1, 1989 if the Plan is Top Heavy and for all Plan Years beginning on or after January 1, 1989, the aggregate of the Monthly Earnings to be taken into account for any Plan Year under the Plan shall not exceed $150,000 ($200,000 prior to January 1, 1994) as adjusted by the Adjustment Factor. In determining the Monthly Earnings of an Employee for purposes of this limitation, the family aggregation rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Employee and any lineal descendants of the Employee who have not attained age 19 before the close of the year. If, as a result of the application of such rules, the adjusted $150,000 ($200,000 prior to January 1, 1994) limitation is exceeded, then the limitation shall be prorated among the affected individuals' -18- 23 Earnings determined under this Section 1.26 prior to the application of this limitation. 1.29 "Non-Key Employee" means an Employee who is not a Key Employee. 1.30 "Plan" means the Retirement Plan for Salaried Employees of First Federal of Michigan as set forth herein, as amended from time to time. 1.31 "Plan Year" means the 12-month period commencing January 1. 1.32 "Predecessor Company" means, after December 31, 1982, a company which has been acquired by the Association or by a Related Company and which prior to such acquisition maintained this Plan. 1.33 "Reemployment Commencement Date" means: (a) If an Employee previously has been credited with more than 500 Hours of Service in a computation period and subsequently incurs a Break in Service, the first day on which such Employee is entitled to credit for an Hour of Service after he incurred the Break in Service; and (b) if the Employee is credited with no Hours of Service in any Plan Year commencing after the Reemployment Commencement Date established under (a) above, the first day on which the Employee is entitled to credit for an Hour of Service after such Plan Year. -19- 24 1.34 "Related Company" means: (a) any corporation included within a "controlled group of corporations," as determined under Code Section 414(b) and Regulations issued pursuant thereto (except that, with respect to the benefit limitation under Section 4.2 hereof, such determination shall be made after substituting the phrase "more than 50%" for the phrase "at least 80%" each place it appears in Section 1563(a)(1) of the Code); (b) any partnership, sole proprietorship, trust, estate or corporation included within a "parent-subsidiary group of trades or businesses under common control," a "brother-sister group of trades or businesses under common control," or a "combined group of trades or businesses under common control," as determined under Code Section 414(c) and Regulations issued pursuant thereto; and (c) any corporation, partnership, or other organization which is included within an "affiliated service group," as determined under Code Section 414, including Section 414(m), (n) and (o), and Regulations issued pursuant thereto. 1.35 "Retired Employee" means an Employee who has retired under the Plan and is receiving a retirement benefit in accordance with Section 5.1 or Section 15.6 of the Plan. 1.36 "Spouse" means the husband or wife, as the case may be, to whom an Employee is legally married, provided that a former spouse will be treated as the Spouse or surviving Spouse and a current spouse will not be treated as the Spouse or surviving Spouse to the extent provided under a qualified domestic relations order as described in Section 414(p) of the Code. -20- 25 1.37 "Social Security Retirement Age" means the age used as the retirement age under Section 216(1) of the Social Security Act, which is age 65 in the case of an Employee attaining age 62 before January 1, 2000 (i.e., born January 1, 1938), age 66 for an Employee attaining age 62 after December 31, 1999, and before January 1, 2017 (i.e., born after December 31, 1937, but before January 1, 1955), and age 67 for an Employee attaining age 62 after December 31, 2016 (i.e., born after December 31, 1954). 1.38 "Vested Employee" means an Employee who terminates employment with the Association at any time prior to retirement and is eligible for a retirement benefit in accordance with Section 5.1 or Section 15.5(b). 1.39 "Years of Service" means service as an Employee to the date of his retirement or termination of employment determined in accordance with Section 6.1 for purposes of determining an Employee's eligibility: (a) for coverage under the Plan (Article II) and (b) for a retirement benefit (other than a Disability Retirement Benefit after December 31, 1980) under Articles IV and V of the Plan. 1.40 Whenever the masculine gender is used herein, it is intended also to cover the feminine gender and neuter gender and whenever used herein the singular shall include the plural and the plural the singular. -21- 26 ARTICLE II ---------- ELIGIBILITY ----------- SECTION 2.1 COVERAGE PRIOR TO JANUARY 1, 1976. Each Covered Employee or Retired Employee who was covered under the Plan in effect on December 31, 1975 shall automatically be covered under the Plan as of January 1, 1976. SECTION 2.2 COVERAGE ON AND AFTER JANUARY 1, 1976. An Employee, other than those included in Section 2.1, shall automatically become a Covered Employee on January 1, 1976, if then employed by the Association or, if not, on January 1 of any Plan Year prior to the Company Merger Effective Time in which he completes the requirements of either (a) or (b) below: (a) (1) The completion of 1 Year of Service, and (2) the attainment of age 21 (25 prior to January 1, 1985). (b) The completion of 3 Years of Service. SECTION 2.3 SUSPENSION OF COVERAGE. A Covered Employee who has a Break in Service shall, upon reemployment, be reinstated as a Covered Employee unless he has 5 consecutive 1-year Breaks in Service (1 1-year Break in Service for a Covered Employee who does not have at least 1 Hour of Service on or after January 1, 1985) as determined in accordance with Section 6.2 and does not then have a nonforfeitable right to a benefit under the Plan, in which event he must again meet the conditions of Section 2.2 to again become a Covered Employee under the Plan. -22- 27 SECTION 2.4 DETERMINATION OF ELIGIBILITY. The eligibility of each Employee to become covered under the Plan shall be determined by the Pension Committee in accordance with this Article II. SECTION 2.5 LEASED EMPLOYEES. A Leased Employee who is deemed to be an Employee under Section 1.17, shall become a Covered Employee in and accrue benefits under the Plan based on service as a Leased Employee. For purposes of the Plan, a "Leased Employee" means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least 1 year, which services are of a type historically performed by employees in the business field of the recipient employer; provided, however, that if the Internal Revenue Service issues any change in regulations governing the definition of leased employee, the term "Leased Employee" shall, as of the effective date of such change, be defined in accordance with such regulations. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. -23- 28 ARTICLE III ----------- RETIREMENT DATES ---------------- SECTION 3.1 NORMAL RETIREMENT DATE. The Normal Retirement Date of a Covered Employee shall be the date on which the Employee attains age 65. A Covered Employee who has reached his Normal Retirement Date shall have a nonforfeitable right to his Normal Retirement Benefit, payable as provided herein. SECTION 3.2 DEFERRED RETIREMENT DATE. On and after January 1, 1987, a Covered Employee may remain actively employed by the Association after his Normal Retirement Date; provided, however, that unless otherwise requested by the Board of Directors of the Association, if he is employed in a bona fide executive or high policy making position he shall retire on his Normal Retirement Date if on that date he is entitled to an immediate nonforfeitable annual retirement benefit from a pension, profit sharing, savings or deferred compensation plan, or any combination of such plans, of the Association, which equals, in the aggregate, at least $44,000. Prior to January 1, 1987, a Covered Employee could remain actively employed by the Association after attaining age 70 only at the request of the Board of Directors of the Association, provided that additional periods of active service beyond age 70 were for 1 year at a time and each subsequent additional year of employment was requested of and approved by the Board of Directors of the Association. The Deferred Retirement Date of a Covered Employee who remains actively employed after his Normal Retirement Date shall be the first day of the month next -24- 29 following the date his employment with the Association terminates. A Covered Employee's Normal Retirement Benefit shall commence as provided in Article VII hereof. SECTION 3.3 EARLY RETIREMENT DATE. The Early Retirement Date of a Covered Employee who has: (a) 10 or more Years of Service, and (b) attained his 55th birthday but not his 65th birthday, shall be the first day of the month next following the date he retires from the Association and such Covered Employee shall be eligible for an Early Retirement Benefit. SECTION 3.4 DISABILITY RETIREMENT DATE. Prior to January 1, 1994, the Total and Permanent Disability Retirement Date of a Covered Employee with 3 or more years of Credited Service (Years of Service for Employees becoming disabled prior to January 1, 1981), shall be the first day of the month next following the date he is deemed to be totally and permanently disabled as determined by the Pension Committee in accordance with Section 4.4(c). On and after January 1, 1994, no Total and Permanent Disability Retirement Benefit shall be payable to any employee other than an employee receiving a Total and Permanent Disability Retirement Benefit prior to January 1, 1994. ARTICLE IV RETIREMENT BENEFITS SECTION 4.1 RETIRED EMPLOYEES ON JANUARY 1, 1976. The monthly retirement benefit payable to a Covered Employee who retired or terminated employment prior to January 1, 1976, shall -25- 30 be an amount as determined in accordance with the terms of the Plan as in effect as of December 31, 1975. SECTION 4.2 NORMAL RETIREMENT BENEFIT. The monthly Normal Retirement Benefit payable to a Covered Employee retiring on his Normal or Deferred Retirement Date on or after January 1, 1976, shall be the greatest of: (i) an amount equal to 2% of the Covered Employee's Final Average Monthly Earnings times his Credited Service to his Normal Retirement Date (or, subject to Section 7.4, his Deferred Retirement Date if he has at least 1 Hour of Service on and after January 1, 1988), but such monthly retirement benefit shall not exceed 60% of his Final Average Monthly Earnings; or (ii) The sum of: (A) such Employee's Accrued Benefit under Section 4.2(i) based on his Final Average Monthly Earnings and his years of Credited Service as of December 31, 1993; and (B) an amount equal to 2% of the Covered Employee's Final Average Earnings times his Credited Service after December 31, 1993 to his Normal Retirement Date (or, subject to Section 7.4, his Deferred Retirement Date); provided, however, that in determining such Employee's benefit under this Section 4.2(ii), those years of Credited Service of the Employee in excess of 30 years of Credited Service which produce the lowest benefit shall be disregarded; or (iii) if this Plan is a Top Heavy Plan, the minimum Top Heavy benefit under Section 8.2. -26- 31 (a) Anything to the contrary herein notwithstanding, the "maximum annual benefit" payable to an Employee hereunder and under any other defined benefit plans of the Association and all Related Companies shall not exceed the lesser of $90,000, as adjusted by the Adjustment Factor (the "Defined Benefit Dollar Limitation"), beginning at Social Security Retirement Age, or 100% of the Employee's average Compensation for the 3 consecutive Years of Service with the Association and all Related Companies which produces the highest amount (or lesser if the Employee does not have 3 consecutive years). For purposes hereof: (1) ADJUSTMENT OF LIMITATION FOR YEARS OF SERVICE OR PARTICIPATION. If a Covered Employee has completed less than 10 Years of Participation (as defined in paragraph (10) below), the Covered Employee's Accrued Benefit shall not exceed the Defined Benefit Dollar Limitation as adjusted by multiplying such amount by a fraction, the numerator of which is the Covered Employee's number of Years (or part thereof) of Participation in the Plan, and the denominator of which is 10. If the Covered Employee has less than 10 Years of Service, the Compensation limitation shall be reduced by 1/10 for each Year of Service (or part thereof) less than 10. The adjustments of this paragraph (1) shall be applied to the denominator of the defined benefit fraction based upon Years of Service. Solely for purposes hereof, Years of Service shall include future years occurring before the Covered Employee's Normal Retirement Date. Such future years shall include the year which contains the Covered Employee's Normal Retirement Date, only if it can be reasonably anticipated that the Covered Employee will receive a Year of Service for such year. In no event shall the adjustment in this Section 4.2(a)(1) reduce the limitations provided under Sections 415(b)(1) and 415(b)(4) of the Code to an amount less than 1/10 of the applicable limitation (as determined without regard to this Section 4.2(a)(1)). -27- 32 To the extent provided by the Secretary of the Treasury, this Section 4.2(a)(1) shall be applied separately with respect to each change in the benefit structure of the Plan. (2) ADJUSTMENT FOR EARLY RETIREMENT. If the retirement benefit of a Covered Employee commences before the Covered Employee's Social Security Retirement Age, but on or after age 62, the Defined Benefit Dollar Limitation as reduced above, if necessary, shall be determined as follows: (A) If a Covered Employee's Social Security Retirement Age is 65, the dollar limitation for benefits commencing on or after age 62 is determined by reducing the Defined Benefit Dollar Limitation by 5/9 of 1% for each month by which benefits commence before the month in which the Covered Employee attains age 65. (B) If a Covered Employee's Social Security Retirement Age is greater than 65, the dollar limitation for benefits commencing on or after age 62 is determined by reducing the Defined Benefit Dollar Limitation by 5/9 of 1% for each of the first 36 months and 5/12 of 1% for each of the additional months (up to 24 months) by which benefits commence before the month of the Covered Employee's Social Security Retirement Age. If the annual benefit of a Covered Employee commences prior to age 62, the Defined Benefit Dollar Limitation shall be the actuarial equivalent of an annual benefit beginning at age 62, as determined above, reduced for each month by which benefits commence before the month in which the Covered Employee attains age 62. Any decrease in the Defined Benefit Dollar Limitation shall not reflect the mortality decrement to the extent that benefits will not be forfeited upon the death of the Covered Employee. (3) ADJUSTMENT FOR POSTPONED RETIREMENT. If the retirement benefit of a Covered Employee commences after the Covered Employee's Social Security Retirement Age, the Defined Benefit Dollar Limitation as reduced in (2) above shall be adjusted so that it is the Actuarial Equivalent of a benefit of the Defined Benefit Dollar Limitation beginning at the Social Security Retirement Age. (4) ADJUSTMENT TO ACTUARIAL EQUIVALENT. Notwithstanding any other provision of this Plan, if the annual benefit is payable under the Plan to a Covered Employee in a form other than a Single Life Annuity or a -28- 33 Qualified Joint and Survivor Annuity, the maximum annual amount shall be adjusted to the Actuarial Equivalent of a Single Life Annuity beginning at the same age. (5) PRESERVATION OF CURRENT ACCRUED BENEFIT UNDER DEFINED BENEFIT PLAN. If the Current Accrued Benefit of an individual who is a Covered Employee as of the first day of any Limitation Year beginning on or after April 1, 1987, exceeds the benefit limitations under Section 415(b) of the Code (as modified by this Section 4.2), then, for purposes of Code Section 415(b) and 415(e), the Defined Benefit Dollar Limitation with respect to such individual shall be equal to such Current Accrued Benefit. The preceding sentence applies only if the Plan met the requirements of Section 415 of the Code, as in effect on July 1, 1982, for all Limitation Years beginning before January 1, 1987. In the case of an individual who was a participant in a defined benefit plan of the Association or any Related or Predecessor Company on or before December 31, 1982, the maximum annual amount for such individual shall not be less than the individual's accrued benefit under all such defined benefit plans of the Association and all Related and Predecessor Companies as of December 31, 1982. The preceding sentence applies only if the Plan met the requirements of Section 415 of the Code, as in effect on July 1, 1982, for all Limitation Years beginning prior to December 31, 1982. (6) SPECIAL RULES FOR PLANS SUBJECT TO OVERALL LIMITATIONS UNDER CODE SECTION 415(E). If a Covered Employee is a participant at any time in this Plan and any defined contribution plan maintained by the Association or any Related Companies, then the Association shall reduce the rate of benefit accrual for such Covered Employee in this Plan to the extent necessary, after taking into account reductions in benefit accruals and annual additions in other plans of the Association and Related Companies, as determined by the Committee, to prevent the sum of the following fractions, computed as of the close of the Plan Year, from exceeding 1.0: (A) The Covered Employee's projected annual benefit under this Plan and any other defined benefit plans over the lesser of: (i) The product of 1.25, multiplied by the Defined Benefit Dollar Limitation for such year (such limitation to be first adjusted as set forth in Section 4.2(a)(1) through (5) hereof and to apply -29- 34 only to Plan Years ending within the calendar year of the adjustment); or (ii) The product of 1.4, multiplied by 100% of the Covered Employee's average Compensation for the 3 consecutive Years of Service with the Association and any Related or Predecessor Companies that produces the highest amount, including any adjustments under Section 415(b) of the Code; and (B) The sum of the annual additions to the Covered Employee's account under any defined contribution plans (whether or not terminated) maintained by the Association and any Related or Predecessor Companies as of the close of the Plan Year over the sum of the lesser of the following amounts for such year and for each prior Year of Service with the Association and any Related or Predecessor Companies: (i) The product of 1.25, multiplied by the Defined Contribution Dollar Limitation; (ii) The product of 1.4, multiplied by 25% of the Covered Employee's Compensation for such year. For purposes of the foregoing: (AA) In computing the defined contribution plan fraction for any year, (i) the "Defined Contribution Dollar Limitation" applicable under Section 4.2 hereof during each of such prior years of service with a Predecessor Company occurring on or before January 1, 1976 shall be $25,000, and (ii) contributions made on behalf of the Employee to a Plan established by any Predecessor Company shall be included in computing the sum of the annual additions to the Employee's Account under Section 4.2(a)(6)(B) hereof. (BB) DEFINED CONTRIBUTION PLAN FRACTION. For purposes of computing the defined contribution plan fraction under Section 4.2(a)(6)(B), "Annual Addition" means the amount allocated to a Covered Employee's account during the Limitation Year as a result of: (i) Association contributions, (ii) Employee contributions, -30- 35 (iii) Forfeitures, and (iv) Amounts described in Sections 415(l)(2) and 419A(d)(2) of the Code. (CC) RECOMPUTATION NOT REQUIRED. The Annual Addition for any Limitation Year beginning before January 1, 1987, shall not be recomputed to treat all Covered Employee contributions as an Annual Addition. (DD) ADJUSTMENT OF DEFINED CONTRIBUTION PLAN FRACTION. If the Plan satisfied the applicable requirements of Section 415 of the Code as in effect for all Limitation Years beginning before April 1, 1987, an amount shall be subtracted from the numerator of the defined contribution plan fraction (not exceeding such numerator) as prescribed by the Secretary of the Treasury so that the sum of the defined benefit plan fraction and defined contribution plan fraction computed under Section 415(e)(1) of the Code (as revised by this Section 4.2(a)(6)) does not exceed 1.0 for such Limitation Year. The amount to be subtracted shall equal the product of: (i) The excess of the sum of such fractions over 1.0 times; (ii) The denominator of the defined contribution fraction. The adjustment is calculated using the fractions as they would be computed as of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plans made after May 5, 1988, but using the Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. (EE) PROJECTED ANNUAL BENEFIT. Projected annual benefit means the annual benefit which a Covered Employee would be entitled to receive under the terms of the Plan, if the Covered Employee continued employment until his Normal Retirement Date (or his current age, if later) and the Covered Employee's Compensation for the Plan Year ("Limitation Year") and all other relevant factors used to determine if such benefit remained constant until his Normal Retirement Date (or his current age, if later). -31- 36 (7) ACTUARIAL EQUIVALENCE. To determine Actuarial Equivalence for all purposes of this Section 4.2(a): (A) Except as provided in paragraph (C) below, the Actuarial Equivalent value shall be computed on the basis of an interest rate assumption of 5%; and (B) Except as provided in paragraph (D) below, the Actuarial Equivalent value shall be calculated based on the 1984 Unisex Pension Mortality Table; and (C) On and after January 1, 1995, the lump sum Actuarial Equivalent value for any Plan Year for any form of benefit subject to Section 417(e)(3) of the Code, shall be calculated based on the annual rate of interest on 30-year Treasury securities for November of the Plan Year preceding the date of the distribution (the "Applicable Interest Rate"); and (D) On and after January 1, 1995, for purposes of adjusting any benefit or limitation under Section 4.2(a)(2), (a)(3) or (a)(4) (including the lump sum Actuarial Equivalent value for any form of benefit subject to Section 417(e)(3) of the Code), the Actuarial Equivalent value shall be calculated using the table prescribed by the Secretary of Treasury pursuant to Section 415(b)(2)(E)(v) of the Code (the "Applicable Mortality Table"); provided, however, that in no event shall any Accrued Benefit of any Participant be reduced below the Accrued Benefit of such Participant as of December 31, 1994. (8) DEFINITION OF ASSOCIATION. For purposes of applying the foregoing, all employers of a controlled group of corporations (as defined by Code Section 414(b)), and all employers which are under common control (as defined by Code Section 414(c), as modified by Code Section 414(h)), shall be considered a single employer and included in the definition of the term "Association." (9) MAXIMUM BENEFIT. In addition to the other limitations set forth herein and notwithstanding any other provision hereof, the Accrued Benefit, including the right to an optional benefit provided hereunder (and under all other defined benefit plans required to be aggregated with this Plan under provisions of Section 415 of the Code), shall not exceed the amount -32- 37 permitted under Section 415 of the Code, as amended by the Tax Reform Act of 1986. (10) YEARS OF PARTICIPATION. The Covered Employee shall be credited with a Year of Participation (computed to fractional parts of a year) for each Plan Year for which the following conditions are met: (A) The Covered Employee is credited with at least the number of Hours of Service for benefit accrual purposes, required under the terms of the Plan in order to accrue a benefit for the Plan Year, and (B) The Covered Employee is included as a Covered Employee under the eligibility provisions of the Plan for at least 1 day of the Plan Year. If these 2 conditions are met, the portion of a Year of Participation credited to the Covered Employee shall equal the amount of Credited Service credited to the Covered Employee for such Plan Year. A Covered Employee who is permanently and totally disabled within the meaning of Section 415(c)(3)(C)(i) of the Code for a Plan Year shall receive a Year of Participation with respect to that Plan Year. For a Covered Employee to receive a Year of Participation (or part thereof) for a Plan Year, the Plan must be established no later that the last day of such Plan Year. In no event will more than 1 Year of Participation be credited for any 12-month period. SECTION 4.3 EARLY RETIREMENT BENEFIT. The monthly Early Retirement Benefit payable to a Covered Employee retiring on or after January 1, 1976, shall be at his option, either: (a) A monthly Deferred Early Retirement Benefit commencing on the first day of the month next following his 65th birthday determined in accordance with Section 4.2, based on such Covered Employee's Credited Service and Final Average Monthly Earnings as of his Early Retirement Date; or (b) A monthly Immediate Early Retirement Benefit commencing on the first day of any month coinciding with or next -33- 38 following his Early Retirement Date determined in accordance with subparagraph (a) above and reduced 0.33 of 1% for each calendar month that his Early Retirement Date precedes his Normal Retirement Date. SECTION 4.4 TOTAL AND PERMANENT DISABILITY RETIREMENT BENEFIT. (a) AMOUNT OF DISABILITY RETIREMENT BENEFIT. A Covered Employee retiring on a Disability Retirement Date prior to January 1, 1994, shall be eligible for a Total and Permanent Disability Retirement Benefit commencing at his Disability Retirement Date in an amount equal to the greater of (1) or (2) below: (1) The Covered Employee's Accrued Benefit as of the Disability Retirement Date; or (2) 55% of the Covered Employee's Monthly Earnings as of the January 1 preceding his date of disability retirement less 50% of his monthly disability retirement benefit (or retirement benefit, if applicable) payable under the Federal Social Security Act to the Covered Employee at the date of disability retirement. No Total and Permanent Disability Retirement Benefit shall be payable to any employee other than an employee who commenced receiving a Total and Permanent Disability Retirement Benefit prior to January 1, 1994. For purposes of this subparagraph (a), a Covered Employee will be presumed eligible for a disability retirement benefit (or retirement benefit, if applicable) under the Federal Social Security Act unless and until he furnishes -34- 39 satisfactory evidence to the Committee that he has been ruled ineligible therefor for a reason other than any act or omission on his part. If such evidence is furnished after commencement of his Disability Retirement Benefit, appropriate adjustment shall be made retroactively, if necessary, in the amount of his disability benefit. If a Covered Employee who has furnished such evidence subsequently becomes eligible for a disability retirement benefit (or retirement benefit, if applicable) under the Federal Social Security Act (as a result of an appeal, redetermination or otherwise), he shall promptly notify the Committee of this fact and his disability income shall be redetermined in accordance with this subparagraph (a) effective the first day of the month next following the month for which a disability retirement benefit (or retirement benefit, if applicable) under the Social Security Act first became payable to him. (b) DEDUCTION FROM DISABILITY RETIREMENT BENEFIT. The Total and Permanent Disability Retirement Benefit, as determined in paragraph (a) of this Section 4.4, shall be reduced by: (1) any sickness and accident benefits or salary continuation benefits payable by the Association for such disability, and (2) any Workers' Compensation Benefits payable to the Retired Employee with respect to his disability; provided that the reduction for all such benefits be made only with respect to the period in which they are actually paid. In case of a lump sum settlement under Workers' Compensation, the lump sum shall be divided by the weekly -35- 40 payment to which the Retired Employee was otherwise entitled under Workers' Compensation in order to determine the period and amount with respect to which Workers' Compensation shall be considered as payable for purposes of this Section. If, prior to January 1, 1987, a Retired Employee elects to have his Disability Retirement Benefits paid in a form other than a Single Life Annuity as permitted by Section 4.5, any actuarial adjustment in the Retired Employee's Disability Retirement Benefits (as such benefits are determined under paragraph (a) of this Section 4.4) which is required by Section 4.5 shall be made prior to any reduction in such benefits required by this paragraph (b) of Section 4.4. (c) DETERMINATION OF DISABILITY. A Covered Employee shall be deemed to be totally and permanently disabled when, on the basis of medical evidence satisfactory to the Committee it is found that the Covered Employee, due to his physical and/or mental condition is totally and presumably permanently prevented from engaging in any occupation or employment for which he may be suited by education, training or experience, as determined by the Committee. (d) PROOF OF DISABILITY. A Retired Employee receiving a Disability Retirement Benefit may be required by the Committee to submit to a medical examination by a physician or clinic selected by the Committee at any time during disability retirement, but not more often than semi-annually, to determine whether he is eligible for continuance of the Disability Retirement Benefit. If, on the basis of any such examination, it -36- 41 is found by the Committee, in its sole discretion, that such Retired Employee is no longer disabled, his Disability Retirement Benefit shall cease. In the event the Retired Employee refuses to submit to a medical examination, his Disability Retirement Benefit shall be suspended until he submits to an examination. (e) RECOVERY FROM DISABILITY. A Retired Employee receiving a Total and Permanent Disability Retirement Benefit who recovers from his disability and is reemployed by the Association at the termination thereof, shall have his Credited Service and Years of Service as of his date of disability reinstated and upon subsequent retirement or termination of employment he shall be entitled to have the retirement benefit which he might then be eligible to receive based on his Final Average Monthly Earnings at the date of such retirement or termination of employment and his Years of Service and Credited Service at the time of his disability plus any Years of Service and Credited Service attributable to service with the Association subsequent to such reemployment. A Retired Employee receiving a Total and Permanent Disability Retirement Benefit who recovers from his disability prior to age 65 and is not reemployed by the Association upon such recovery shall have his eligibility for a benefit determined in accordance with: (1) Section 5.1, if he has not attained his 55th birthday, or (2) Section 3.3, if he has attained his 55th birthday, -37- 42 with such eligibility and amount of retirement benefit based on the Retired Employee's Final Average Monthly Earnings, Years of Service and Credited Service at his Total and Permanent Disability Retirement Date. (f) ATTAINMENT OF THE LATER OF AGE 65 OR 5 YEARS OF DISABILITY. At the later of age 65 or after receipt of at least 5 years of disability benefits (but not later than the date the Employee attains age 70), a Covered Employee's Disability Retirement Benefit shall cease and the Employee's Normal Retirement Benefit described in Section 4.2 shall commence on the first day of the month thereafter, based on such Employee's Final Average Monthly Earnings and Credited Service to his Disability Retirement Date; provided, however, that a Covered Employee may elect to have his Normal Retirement Benefit or Early Retirement Benefit commence prior to such time, in which event his Disability Retirement Benefit shall cease upon commencement of Normal or Early Retirement Benefit payments. (g) DEATH OF EMPLOYEE. In the event of the death of a Covered Employee while receiving Disability Retirement Benefits, the Covered Employee's Disability Retirement Benefit shall cease. If the Covered Employee's Disability Retirement Benefits commenced prior to January 1, 1987, and the Covered Employee did not waive the Qualified Joint and Survivor Annuity form of payment of such benefits, upon the Covered Employee's death his Eligible Spouse shall be entitled to a survivor annuity in accordance with the Qualified Joint and Survivor Annuity -38- 43 provisions of Section 4.5(a) hereof. If the Covered Employee's Disability Retirement benefits commenced on or after January 1, 1987 upon the Covered Employee's death, if the Employee is married, the Covered Employee's Surviving Spouse shall be entitled to the Death Benefits provided under Section 5.2 of the Plan. SECTION 4.5 RETIREMENT BENEFIT PAYMENTS. (a) NORMAL FORM OF PAYMENT. The Normal Form of retirement benefit payment is (1) for an Employee who is married at the time benefits commence, an immediate monthly income payable to the Employee commencing as provided in Sections 3.1, 3.2 or 3.3, or Article V or prior to January 1, 1987, Section 3.4 during the lifetime of the eligible Employee with a survivor annuity for the lifetime of his Surviving Spouse which is equal to 50% of the amount of the annuity payable during the joint lives of the Employee and his Surviving Spouse (a "Qualified Joint and Survivor Annuity"); and (2) for an Employee who is not married at the time such benefits commence under the Plan and for an Employee who is entitled to a monthly income payable to the Employee commencing as provided in Section 3.4 on or after January 1, 1987, an immediate monthly pension payable to the Employee, continuing for his lifetime only (a "Single Life Annuity"). For purposes of the foregoing, benefits of an Employee and his Surviving Spouse under a Qualified Joint and Survivor Annuity shall be Actuarially Equivalent to the benefits the Employee otherwise would be entitled to receive in the form of a Single Life Annuity under Article IV or V such that the amount of the Covered Employee's -39- 44 reduced benefit shall be 85% of the benefit the Covered Employee would otherwise have been eligible to receive, increased by 1% for each year the spouse is older than the Covered Employee (maximum 100%) or reduced 1% for each year the spouse is younger than the Covered Employee; provided, however, that in the case of a Disability Retirement Benefit commencing prior to January 1, 1987, the Qualified Joint and Survivor Annuity shall only be applicable to an amount determined in accordance with Section 4.4(a). Pensions shall be payable to eligible Employees in the Normal Form, unless another form of payment is elected as provided in this Section 4.5. (b) SINGLE LIFE ANNUITY FORM OF PAYMENT. In lieu of the monthly pension benefit otherwise payable in the form of a Qualified Joint and Survivor Annuity, a married Employee who retires pursuant to the Normal Retirement, Deferred Retirement, Early Retirement, or the termination of employment provisions of Article V, or who, prior to January 1, 1987, retires pursuant to the Total and Permanent Disability Retirement provision of Section 3.4, or who, on or after January 1, 1987, after retiring pursuant to a Permanent and Total Disability Retirement elects to receive Early Retirement benefits pursuant to Section 3.3 or attains his Normal Retirement Date and receives Normal Retirement Benefits (other than Total and Permanent Disability Retirement Benefits if they commence on or after January 1, 1987) may elect within a 90-day period ending on the date such benefits (other than Total and Permanent Disability benefits if they commence on or after January 1, 1987) are to commence, pursuant to a Qualified -40- 45 Election, to receive his Normal, Deferred, Early Retirement benefits, or termination of employment benefit or, prior to January 1, 1987, Disability Retirement benefits, in the form of a Single Life Annuity as determined under Article IV or Article V. (c) OPTIONAL RETIREMENT BENEFIT. In lieu of the Qualified Joint and Survivor Annuity or Single Life Annuity benefit provided under the Plan, a Covered Employee may elect by a Qualified Election to the Committee a 100% Joint Annuitant Option; provided, however, that such option shall only be available as of the date such Retired Employee's Normal Retirement Benefit commences. Under the 100% Joint Annuitant Option, the Covered Employee shall receive a reduced retirement benefit during his lifetime after his retirement with 100% of such reduced retirement benefit to be paid after the Covered Employee's death to, and for the lifetime of, the Covered Employee's spouse at the time of election of the Option. The amount of reduced benefit payable to the Covered Employee shall be 74% of the benefit such Covered Employee would otherwise be eligible to receive increased by 1% for each year the spouse is older than the Covered Employee (maximum 100%) or reduced 1% for each year the spouse is younger than the Covered Employee. (d) The Committee shall provide each married Employee no less than 30 days and no more than 90 days prior to the commencement of benefits, a written explanation of: (1) the terms and conditions of the Qualified Joint and Survivor Annuity; -41- 46 (2) the Employee's right to make, and the effect of, an election to waive the Qualified Joint and Survivor Annuity Benefit; (3) the rights of an Employee's Spouse; (4) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity; and (5) the relative values of the various optional forms of benefits under the Plan. For purposes of this Section 4.5(d) "benefit commencement date" shall mean the date on which Normal Retirement, Early Retirement, Deferred Retirement or termination of employment benefits commence hereunder, or, for an Employee retired pursuant to a Disability Retirement whose Disability Retirement benefits commenced prior to January 1, 1987, the date on which such Disability Retirement benefits commence. (e) MISCELLANEOUS. For purposes hereof: (1) A Qualified Election means a waiver by the Employee of the Qualified Joint and Survivor Annuity. If made on or after January 1, 1987: (A) the waiver must be in writing and designate the manner in which benefits shall be payable; (B) the Employee's Spouse must consent to the waiver in writing; (C) the waiver must designate a beneficiary (or a form of benefits) which may not be changed without the Spouse's consent (unless the Spouse's consent expressly permits designations by the Employee without any requirement of further Spousal consent); (D) the Spouse's consent acknowledges the effect of the election and is witnessed by a notary public. Notwithstanding this consent requirement, if the Employee establishes to the satisfaction of the Committee that such written consent may not be obtained because there is no Spouse or the Spouse cannot be located, a waiver by the Employee will be deemed a Qualified Election. The Employee shall only be deemed to establish to the satisfaction of the Committee that such written consent may not be obtained because the spouse cannot be located by signing an affidavit to such effect witnessed by a notary public. Any consent necessary under this provision will be valid only: (A) with respect to the -42- 47 Spouse who signs the consent, or in the event of a deemed Qualified Election, the designated Spouse; and (B) with respect to the manner of benefit payment consented to by the Spouse. A subsequent spouse shall not be bound by the consent of a prior spouse. Additionally, a revocation of a prior waiver may be made by an Employee without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. A Spouse's consent shall be revocable by the Spouse unless otherwise set forth in the consent. No consent obtained under this provision shall be valid unless the Employee has received the notice referred to in Section 4.5(d) above. (2) In the event the benefits of any Employee (or former Employee or Spouse of either) commence prior to January 1, 1987, under such provisions of the Plan as in effect prior to January 1, 1987, such benefits shall continue to be paid in the form and manner and pursuant to the terms of such provisions of the Plan as in effect prior to January 1, 1987; provided, however, that in no event shall this result in any duplication of benefits or charges to any Employee, former Employee or Spouse hereunder. (3) An Employee may elect to have his Single Life Annuity or Qualified Joint and Survivor Annuity payable upon attainment of the earliest retirement age under the Plan. If after an Employee's benefits commence hereunder such Employee accrues additional benefits, such benefits shall be distributed as a separate and identifiable component of the form of benefit previously elected by the Employee beginning with the first payment interval ending in the Plan Year immediately following the Plan Year in which such benefit accrues. (4) Any married living former Covered Employee to whom benefits become payable in the form of a life annuity, who was not receiving benefits on August 23, 1984, was credited with at least 1 Hour of Service under this Plan on or after September 2, 1974, and who is not otherwise credited with any Hours of Service in a Plan Year beginning on or after January 1, 1976, and who: (A) begins to receive payments under the Plan on or after Normal Retirement Age; or (B) begins to receive payments on or after attaining Early Retirement Age; may elect to have his benefits paid under the Plan in the form of a Qualified Joint and Survivor Annuity. The election of the Qualified Joint and Survivor Annuity -43- 48 shall be provided during the period commencing on the later of August 23, 1984 or 6 months before the former Covered Employee attains Early Retirement Age and ending on the date benefits would otherwise commence to such former Covered Employee. For purposes hereof, "Early Retirement Age" means the later of the earliest date on which the Employee may elect to receive retirement benefits under the Plan or the first day of the 120th month beginning before the Employee reaches Normal Retirement Age. (f) GENERAL PROVISIONS. If the Covered Employee's Spouse dies prior to commencement of the Employee's benefits, the monthly retirement benefit payable to the Covered Employee upon retirement shall be a Single Life Annuity. SECTION 4.6 EMPLOYEE CONTRIBUTIONS. An Employee who is eligible for a retirement benefit in accordance with the provisions of this Article IV and was covered under the Plan in effect on December 31, 1975 shall, in addition to the retirement benefits otherwise payable to him under the Plan, receive a lump sum cash payment equal to his Accumulated Contributions in accordance with Section 7.3(g); provided, however, that after December 31, 1984, unless the Employee and his Spouse, if any, elect pursuant to a Qualified Election under Section 4.5, to receive a lump sum cash payment, the Actuarial Equivalent of such lump sum cash payment shall be paid to such Employee and his Spouse, if any, in the Normal Form, or in such other optional form of benefit as the Employee shall have elected under Section 4.5, pursuant to a Qualified Election with respect to the other retirement benefits payable to him. -44- 49 ARTICLE V --------- TERMINATION OF EMPLOYMENT AND DEATH ----------------------------------- SECTION 5.1 TERMINATION OF EMPLOYMENT. (a) TERMINATION WITHOUT 5 YEARS OF SERVICE OR TOP HEAVY VESTING. A Covered Employee who has neither completed 5 or more Years of Service (10 or more Years of Service for those Covered Employees who do not have at least 1 Hour of Service on or after January 1, 1989) nor become vested pursuant to the provisions of Section 8.1 and who has a Break in Service, as defined in Section 6.2, on or after January 1, 1976, other than by reason of death, prior to becoming eligible for a retirement benefit, shall lose all rights under the Plan unless such Covered Employee had accumulated contributions on or after January 1, 1989 (in which event Section 5.1(b) shall apply). If such Employee was covered under the Plan prior to January 1, 1976, he received a lump sum payment equal to: (1) His Accumulated Contributions if he had less than 5 Years of Service, or (2) Twice the amount set forth in paragraph (1) above if he had 5 but less than 10 Years of Service; provided, however, that after December 31, 1984, unless the Employee and his Spouse, if any, elect pursuant to a Qualified Election under Section 4.5, to receive a lump sum cash payment, the Actuarial Equivalent of such lump sum cash payment shall be paid to such Employee and his Spouse, if any, in the Normal Form, or in such other optional form of benefit as the Employee shall -45- 50 have elected under Section 4.5, pursuant to a Qualified Election with respect to the other retirement benefits payable to him. (b) TERMINATION WITH 5 OR MORE YEARS OF SERVICE OR TOP HEAVY VESTING. A Covered Employee who has completed 5 or more Years of Service (10 or more Years of Service for those Covered Employees who do not have at least 1 Hour of Service on or after January 1, 1989) or who is partially or wholly vested pursuant to Section 8.1 hereof, or who has accumulated contributions on or after January 1, 1989, and has a Break in Service on or after January 1, 1976 other than by reason of death, prior to becoming eligible for a retirement benefit, shall be eligible to receive, at his election, either: (1) the vested portion of his accrued Normal Retirement Benefit as determined in accordance with Section 4.2 (and Section 8.1, if applicable), based on his Final Average Monthly Earnings and Credited Service at his date of a Break in Service, or, if greater, the vested portion of his minimum Top Heavy benefit as determined under Article VIII, commencing on the first day of the month subsequent to his 65th birthday, or (2) an amount as determined in (1) above commencing on the first day of the month subsequent to his 55th birthday but reduced in accordance with Section 4.3(b). The benefit payable hereunder shall be paid in the Normal Form or in an optional form as provided in Section 4.5 for retirement benefit payments. Such terminating Covered Employee shall receive a lump sum payment equal to his Accumulated Contributions; provided, however, that after December 31, 1984, unless the Employee and his Spouse, if any, elect pursuant to a Qualified Election under -46- 51 Section 4.5, to receive a lump sum cash payment, the Actuarial Equivalent of such lump sum cash payment shall be paid to such Employee and his Spouse, if any, in the Normal Form, or in such other optional form of benefit as the Employee shall have elected under Section 4.5, pursuant to a Qualified Election with respect to the other retirement benefits payable to him. (c) REHIRE OF A TERMINATED EMPLOYEE. If a Covered Employee who has a Break in Service is subsequently rehired, his Years of Service and Credited Service shall be treated in the manner as set forth in Section 6.3. SECTION 5.2 DEATH BENEFITS. (a) DEATH BENEFITS FOR SPOUSES OF CERTAIN COVERED EMPLOYEES WITH VESTED BENEFITS AFTER AUGUST 22, 1984. A death benefit shall be payable to the Surviving Spouse of a Covered Employee (or former Employee), if: (1) Such Employee (or former Employee) at the time of his death had a nonforfeitable right to any portion of his Accrued Benefit derived from Association contributions or pursuant to Section 8.2; and (2) Such Employee (or former Employee), had at least 1 Hour of Service under the Plan after September 1, 1974; and (3) Such Employee (or former Employee), shall die after August 22, 1984 but prior to commencement of his Normal Retirement, Deferred Retirement or Early Retirement benefit payments or his termination of employment benefit payments, or his Disability Retirement benefit payments if such payments commenced prior to January 1, 1987. -47- 52 The Death Benefit payable to such Employee's Surviving Spouse, if any, shall be in the form of a survivor annuity for such Spouse's lifetime, equal to 50% of the Covered Employee's accrued Normal Retirement Benefit based on his Credited Service and Final Average Monthly Earnings as of the date of his death, but if the Spouse is more than 5 years younger than the deceased Covered Employee, then such percentage shall be reduced 1% for each year in excess of 5 years by which the Spouse is younger than the deceased Covered Employee, except that such percentage shall not be less than 25%, such amount to be payable as follows: (1) In the case of an Employee who dies on or after the date on which he became eligible for an Early Retirement Benefit in accordance with Section 3.3 hereof such amount shall be payable commencing on the first day of the month following the death of the Employee. (2) In the case of an Employee who dies before the date as of which he would have become eligible for an Early Retirement Benefit in accordance with Section 3.3 hereof, such amount shall be payable commencing on the first day of the month following the month in which the Employee would have attained the earliest retirement age under the Plan, unless such Spouse elects a later date. Such Spouse's Death Benefit shall end on the first day of the month in which the Surviving Spouse's death occurs. On the death of a Covered Employee who did not receive his Accumulated Contributions under Section 4.6 and whose Spouse is eligible for a benefit under this Section 5.2, his Spouse, or in the event of a Qualified Election under Section 4.8, his named beneficiary shall also receive a lump sum payment equal -48- 53 to his Accumulated Contributions; provided, however, that after December 31, 1984, unless such Spouse, if any, elects in writing to receive a lump sum payment, the Actuarial Equivalent of such lump sum payment shall be paid to such Spouse in the form of an annuity for such Spouse's lifetime. Upon the death of the Spouse of a Covered Employee subsequent to the death of such Employee, the beneficiary of such Spouse shall receive a lump sum payment equal to the excess, if any, of the lesser of: (1) 12 times the Covered Employee's Monthly Earnings as of the January 1 next preceding his date of death, or (2) Twice the Covered Employee's Accumulated Contributions over the aggregate of the retirement income payments made to the Covered Employee's Spouse pursuant to this Section 5.2(a). (b) OTHER DEATH BENEFITS AFTER AUGUST 22, 1984. If a Covered Employee dies on or after August 23, 1984 but prior to becoming entitled to a vested retirement benefit under the Plan, or if the Covered Employee is entitled to a vested retirement benefit under the Plan but such benefit has not commenced and the Employee has no Spouse at the time of his death, then no retirement benefits shall be payable under the Plan, but if such Employee was covered under the Plan prior to January 1, 1976, his Spouse, or his named beneficiary if the Covered Employee has no Spouse or such Spouse consents to distribution to such beneficiary in a manner conforming to a Qualified Election under -49- 54 Section 4.5(e), shall be entitled to an immediate lump sum payment equal to the Covered Employee's Accumulated Contributions, plus the lesser of: (1) 12 times the Covered Employee's Monthly Earnings as of the January 1 next preceding his date of death; or (2) Twice the Covered Employee's Accumulated Contributions; provided, however, that if the death benefit is payable to the Employee's Spouse on or after January 1, 1985, then it shall be paid in the form of an Actuarially Equivalent survivor annuity for such Spouse's lifetime commencing on the first day of the month following the date the Employee otherwise would have attained Normal Retirement Age under the Plan, unless such Spouse shall elect in writing to receive such death benefit in an immediate lump sum payment and upon such Spouse's death after commencement of such Spouse's survivor annuity, no further death benefit shall be payable by reason of the death of the Employee. If the death of the Spouse occurs prior to commencement of annuity payments to such Spouse, the Employee's named Beneficiary shall immediately receive a lump sum payment equal to the amount of the death benefit. (c) DEATH PRIOR TO AUGUST 23, 1984. If an Employee died prior to August 23, 1984 and prior to commencement of his benefits, such Employee's Spouse and beneficiaries shall be entitled to Death Benefits if and to the extent elected by such -50- 55 Employee and as provided under the terms of the Plan as in effect prior to January 1, 1984. (d) Unless otherwise specifically allowed elsewhere herein, the death of an Employee shall not be cause for the payment of any benefit. ARTICLE VI ---------- YEARS OF SERVICE AND CREDITED SERVICE ------------------------------------- SECTION 6.1 SERVICE CREDITED UNDER THE PLAN. (a) YEARS OF SERVICE. (1) PAST SERVICE. A Covered Employee shall receive 1 Year of Service for each year or portion thereof of employment with the Association as a salaried employee from his last day of employment with the Association, including service with any organization that has merged with the Association prior to January 1, 1976, to his last computation period prior to January 1, 1976. (2) FUTURE SERVICE. On and after January 1, 1976, a Covered Employee shall be credited with 1 Year of Service for each computation year subsequent to (1) above, preceding the earlier of: (A) his date of retirement, or (B) his date of Break in Service, as defined in Section 6.2(a), that he has 1,000 or more Hours of Service with the Association or Related or Predecessor Companies (without regard to whether such service is as an "Employee") in such computation year. A Covered Employee who in any computation year has less than 1,000 Hours of Service with the Association or Related or Predecessor Companies (without regard to whether such service is as an "Employee") shall accrue no Year of Service for such computation year. (b) CREDITED SERVICE. (1) PAST SERVICE. A Covered Employee on January 1, 1976, who was covered under the Plan as of -51- 56 December 31, 1975, shall receive 1 year of Credited Service computed to the nearest 1/12 for each Year of Service as a salaried employee from his last date of employment with the Association, including service with any organization that has merged with the Association, to his last computation period prior to January 1, 1976. (2) FUTURE SERVICE. On and after January 1, 1976, a Covered Employee shall be credited with 1/12 of a year of Credited Service for each month during each computation year subsequent to (1) above, that he completes 1 or more Hours of Service (within the meaning of Section 1.22 hereof) with the Association as a salaried Employee as defined in the Plan except to the extent he loses Credited Service pursuant to Section 6.2; provided, however, that in no event shall a Covered Employee receive credit for less years of Credited Service than he would have received under the Plan as in effect on March 31, 1984. (c) MINIMUM SERVICE. Notwithstanding the foregoing provisions of paragraphs (a) and (b), the accrued Years of Service and Credited Service to January 1, 1976 of an Employee covered under the Plan as of December 31, 1975, shall not be less than such Covered Employee's Years of Service credited under the terms of the Plan as in effect prior to January 1, 1976. SECTION 6.2 LOSS OF CREDITED SERVICE. (a) BREAK IN SERVICE. On and after January 1, 1976, a Covered Employee shall be deemed to have a "Break in Service" in the later of the computation year in which: (1) He has 500 or less Hours of Service (without regard to whether such service is as an "Employee") with the Association or a Related or Predecessor Company or, (2) The computation year of his termination of employment with the Association and all Related Companies. -52- 57 (b) LEAVE OF ABSENCE. A Covered Employee who is on an Association approved, non-compensated leave of absence which is in accordance with the published rules and regulations of the Association governing leaves of absence or layoffs, and is not accruing Hour(s) of Service in accordance with Section 1.22, shall not lose his accrued Years of Service or Credited Service for purposes of the Plan, but he shall accrue no additional service while on such leave of absence or layoff and if such Covered Employee does not return to work on the termination of such leave of absence or layoff, his status under the Plan shall be determined in accordance with Section 6.2(a). (c) TRANSFERS. If a Covered Employee is transferred to employment not covered by the Plan, he shall thereupon cease to be an active Covered Employee hereunder, and upon his subsequent retirement or termination of employment with the Association and all Related Companies shall receive a benefit determined in accordance with the provisions of Article IV or Article V based on his Accrued Benefit as of his date of transfer with Years of Service for the Association or a Related Company after his transfer date recognized as service for purposes of determining his eligibility for a benefit. If such transferred employee again becomes a Covered Employee hereunder without previously terminating his employment relationship with the Association or a Related Company, he shall thereupon become an active Covered Employee hereunder and -53- 58 accrue additional benefit rights hereunder in accordance with the terms hereof. SECTION 6.3 REHIRES. (a) REHIRE OF A NON-VESTED EMPLOYEE. If a Covered Employee has a Break in Service prior to retirement, and is not vested in any portion of Association provided Accrued Benefits, and is subsequently rehired by the Association, his Years of Service and Credited Service will be based on: (1) His Credited Service and Years of Service subsequent to his last date of coverage under the Plan if the number of his successive 1-year Breaks in Service equals or exceeds the greater of 5 (1, if such Employee does not have at least 1 Hour of Service after December 31, 1984), or his aggregate number of Years of Service prior to such Break in Service. (2) His Credited Service and Years of Service as of his prior date of termination of employment plus his Credited Service and Years of Service subsequent to his date of rehire with the Association if the number of successive 1-year Breaks in Service is less than the greater of 5 (1, if such Employee does not have at least 1 Hour of Service after December 31, 1984) or his aggregate number of Years of Service at his date of rehire. For purposes hereof, if any Years of Service are not required to be taken into account by reason of a period of Breaks in Service to which the preceding sentence applies, such Years of Service shall not be taken into account in applying such sentence to a subsequent period of Breaks in Service. (b) REHIRE OF A VESTED EMPLOYEE. A Covered Employee who has a Break in Service prior to retirement and is vested in any portion of Association provided Accrued Benefits, -54- 59 and is subsequently rehired by the Association as an Employee prior to reaching his Normal Retirement Date, will immediately again become a Covered Employee under the Plan, at which time he shall lose all rights to his Accrued Benefit as of his prior date of termination of employment. On such Covered Employee's subsequent retirement or Break in Service his benefit will be based on his Credited Service as of his prior date of termination of employment plus his Credited Service subsequent to his date of rehire, but such benefit to be reduced by 0.5% of the total benefits paid to the Covered Employee during the period prior to his rehire, unless such Covered Employee received a lump sum payment under Section 11.6, in which event the provisions of such Section shall be applicable. Provision for a Vested Employee who is rehired after his Normal Retirement Date is set forth in Section 7.4(a) hereof. SECTION 6.4 REEMPLOYMENT AFTER RETIREMENT. A Retired Employee who is rehired by the Association shall have his Years of Service and Credited Service treated in the manner set forth in Section 7.4. ARTICLE VII ----------- RETIREMENT BENEFIT PAYMENTS --------------------------- SECTION 7.1 APPLICATION. In order to receive a retirement benefit, a Covered Employee shall make written application to the Committee for such benefit, on a form prescribed by the Committee, not more than 90 days preceding his date of retirement. In the case of a Vested Employee, such -55- 60 application shall be made not more than 90 days preceding his 55th birthday. SECTION 7.2 APPEAL TO PENSION COMMITTEE. A Covered Employee, Retired Employee, Spouse or beneficiary shall have a right to file a claim and to subsequently request a review of any claim denial pursuant to the Claims Procedure and Claims Review Procedure adopted by the Committee if such Covered Employee, Retired Employee, Spouse or beneficiary, feels that he is being denied any benefit or right provided hereunder. The Claims Procedure and Claims Review Procedure adopted by the Committee shall provide such Covered Employee, Retired Employee, Spouse or beneficiary, the opportunity to review pertinent documents relating to any denial, to submit issues and comments in person or in writing and, in the sole discretion of the Committee, to appear before the Committee to present his case. SECTION 7.3 COMMENCEMENT AND DURATION OF PAYMENTS. (a) Normal, Immediate Early Retirement and Deferred Retirement Benefits shall be payable to a Covered Employee commencing on the date the Covered Employee becomes eligible for such benefits, but will not be payable until the Committee receives a proper application from the Covered Employee for such benefit and shall be payable on the first day of each month thereafter during the life of such Retired Employee, but in no event will a retirement benefit be payable after the date of the Retired Employee's death unless a Qualified Joint and Survivor -56- 61 Annuity or a 100% Joint Annuitant Option is applicable in accordance with the provisions of Section 4.5. (b) Deferred Early Retirement Benefits shall be payable to an eligible Covered Employee commencing as of the first day of the month after he attains the age of 65, but will not be payable until the Committee receives proper application for such benefit, and shall be payable on the first day of each month thereafter during the life of such Retired Employee, but in no event will a retirement benefit be payable after the date of the Retired Employee's death unless a Qualified Joint and Survivor Annuity or a 100% Joint Annuitant Option is applicable in accordance with the provisions of Section 4.5. (c) Total and Permanent Disability Retirement Benefits shall be payable to an eligible Covered Employee commencing as of the first day of the month subsequent to the date he is deemed to be totally and permanently disabled by the Committee but will not be payable until the Committee receives proper application for such benefit. Such Disability Retirement Benefit shall be payable until the Retired Employee reaches age 65, or, if later, has received at least 5 years of Disability Benefits (but not later than the date the Employee attains age 70) and otherwise remains eligible for such Disability Retirement Benefit, at which time his benefit will be paid in accordance with Section 4.4(f). (d) Vested Retirement Benefits shall be payable to an eligible Vested Employee commencing as of the first day of -57- 62 the month following the later of: (1) the date such Vested Employee attains age 55 or (2) the date proper application is received by the Committee, and such benefit shall be payable on the first day of each month thereafter during the life of such Vested Employee, but in no event will a retirement benefit be payable after the date of the Vested Employee's death unless a Qualified Joint and Survivor Annuity or a 100% Joint Annuitant Option is applicable in accordance with the provisions of Section 4.5. (e) The first monthly payment to a Covered Employee's Spouse, who is covered by the Spouse's Benefit as set forth in Section 5.2, shall commence on the first day of the month next following the date of the Covered Employee's death and shall be payable monthly thereafter until the date of death of such Spouse. (f) To the extent permitted by law, Normal or Early Retirement Benefits shall not commence until the cessation of any weekly sickness or accident benefits payable to the Covered Employee under any plan to which the Association has contributed. (g) A Retired Employee or terminated Employee who is eligible for a return of his Accumulated Contributions shall be paid such amount in a lump sum payment within 90 days of his retirement or termination of employment, unless the Employee elects, at least 60 days prior to his retirement or termination of employment, by written notice signed by such Employee on a form provided by and filed with the Committee, to receive his -58- 63 Accumulated Contributions in a lump sum payment within the 30-day period commencing in the calendar year following the year of his retirement or termination of employment; provided, however, that after December 31, 1984, unless the Employee and his Spouse, if any, elect pursuant to a Qualified Election to receive a lump sum cash payment, the Actuarial Equivalent of such lump sum cash payment shall be paid to such Employee and his Spouse, if any, in the Normal Form, or in such other optional form of benefit as the Employee shall have elected under Section 4.5, pursuant to a Qualified Election with respect to the other retirement benefits payable to him. Any election or failure to elect a lump sum payment shall be irrevocable upon benefit commencement in accordance with Section 4.5. SECTION 7.4 EMPLOYMENT AFTER RETIREMENT OR TERMINATION. (a) A Retired Employee or Vested Employee who is receiving a retirement benefit under the Plan and is subsequently rehired by the Association at or after age 65 shall continue to receive during such reemployment, any monthly retirement benefits to which the Retired Employee or Vested Employee might otherwise be entitled. Prior to January 1, 1988, the Retired Employee or Vested Employee shall not accrue any additional Years of Service or Credited Service as a result of such employment and the monthly retirement benefit of such Retired Employee or Vested Employee shall not be adjusted in any way with regard to such employment upon subsequent cessation of active service. On and after January 1, 1988, the Retired Employee or Vested Employee shall -59- 64 continue to accrue additional Years of Service or Credited Service as a result of such employment, and the monthly retirement benefit of such Retired Employee shall be subject to adjustment in the same manner as provided in Section 7.4(d). Provision for a Vested Employee who is rehired as an Employee prior to his Normal Retirement Date is made in Section 6.3(b) hereof. (b) If a Retired Employee who is receiving an Early Retirement Benefit or a Vested Employee who is receiving a benefit on termination of employment under the Plan is rehired by the Association as an Employee (as defined in Section 1.17) prior to age 65, he shall cease to receive his retirement benefits under the Plan. On such Employee's subsequent retirement his benefit shall be computed on the basis of his Credited Service as of his prior date of retirement plus any Credited Service attributable to service with the Association subsequent to such reemployment, but such benefit to be reduced by 0.5% of the total benefits paid to the Covered Employee during his prior period of Early Retirement, except for benefit payments for Total and Permanent Disability Retirement. If a Retired Employee who is receiving an Early Retirement Benefit payment or if a Vested Employee who is receiving a termination of employment benefit under the Plan is rehired by the Association other than as an Employee (as defined in Section 1.17) prior to age 65, the Early Retirement Benefit or termination of employment benefit payments to such former Employee shall continue to be paid to such former Employee unless in any Plan Year the former Employee completes 1,000 or more Hours of Service. In any Plan Year in which such former Employee completes -60- 65 1,000 Hours of Service, his benefit payments shall be suspended as of the commencement of the calendar month in such Plan Year which immediately follows his attainment of 1,000 Hours of Service. For purposes of determining a rehired Employee's Final Average Monthly Earnings, the calendar months during which the Retired or Vested Employee was not compensated shall not constitute an interruption of the "consecutive 60 calendar months" referred to in Section 1.19 and if a rehired former Employee is not a Covered Employee his compensation after his rehire shall be disregarded in determining his Final Average Monthly Earnings. (c) Subject to Section 7.4(d), if an Employee does not retire but instead continues in employment past his Normal Retirement Date, he shall not be considered to have taken Normal Retirement and Normal Retirement Benefit payments (other than a minimum pension benefit to which the Employee may be entitled under Section 8.2 hereof) to such Employee shall be suspended for any month during which the Employee completes 40 or more Hours of Service (or receives payment for Hours of Service on each of 8 or more days in the event that actual numbers of Hours of Service are not determined or used by the Plan for that Employee for any purpose). Such suspension of benefits shall occur only if the Committee shall have notified the Employee, by personal delivery or first class mail during the first calendar month in which the Plan withholds payment, that his benefits are suspended. Such notice shall include a description of the reasons -61- 66 why the payments are being suspended; a copy of this Section 7.4; a general description of these suspension of benefits provisions and the Plan's Claims and Claims Review Procedures or, if applicable, the Summary Plan Description, with a reference to the specific pages in which suspension of benefits provisions are discussed; a statement that applicable Department of Labor Regulations may be found in Section 2530.203-3 of the Code of Federal Regulations; a description of the manner in which the Committee will offset any suspendable amounts mistakenly paid, together with a specification of the periods of employment and suspendable amounts subject to offset, if any; and copies of all forms which must be filed by the Employee. The pension of such Employee shall commence or resume not later than the first day of the third month following the month in which the Employee ceases to be employed for 40 or more Hours of Service (or 8 or more days in the event that actual numbers of Hours of Service are not counted, if applicable), provided that the Employee shall have notified the Committee that he has ceased such employment. The Plan's Claims and Claims Review Procedure shall be used for all requests by an Employee for determinations of his status concerning suspension of benefits. Upon the Employee's initial retirement, if he has continued in employment past his Normal Retirement Date, the pension payable to such Employee shall be calculated as set forth in Section 4.2 hereof. Provision for a Retired Employee on Disability Retirement is made in Section 4.4. -62- 67 (d) Anything to the contrary herein notwithstanding, on or after January 1, 1989, the payment of the benefit of any Employee who attains age 70-1/2 on or after January 1, 1988 which is suspended in accordance with the preceding paragraphs of Section 7.4(c) shall commence no later than April 1 of the calendar year following the calendar year in which the Employee attains age 70-1/2. Any such Employee, and any Retired Employee or Vested Employee who is rehired at or after his attainment of his Normal Retirement Date and whose benefit continues to be payable, as described in Section 7.4(a), shall accrue additional Years of Service and Credited Service as a result of such employment and shall have his additional Monthly Compensation considered in determining his benefits. Any benefits which such Employee or Retired Employee or Vested Employee may accrue which are attributable to years of Benefit Service and Monthly Compensation earned after benefit payments commence or after the Retired Employee or Vested Employee is rehired shall be reduced (but not below the Employee's Normal Retirement benefit for the prior Plan Year) by the Actuarial Equivalent of the total benefit distributions made to the Employee by the close of the Plan Year within the meaning of Section 411(b) of the Code and Section 1.411(b)-2(b)(4)(ii) of Regulations thereunder. Distributions shall be disregarded to the extent the total amount of the distribution to the Employee by the close of the Plan Year exceeds the total amount of the distributions the Employee would have received by the close of the Plan Year if the distributions had been made in accordance with the Plan's Normal Form of benefit -63- 68 distribution. If by the close of the Plan Year, the Actuarial Equivalent of total Plan benefit distributions made to the Employee and taken into account hereunder is greater than the total benefit accruals required hereunder for the Plan Years in which such distributions were made, the Plan shall not accrue any benefit on behalf of the Employee for the Plan Year. (e) Anything in this Plan to the contrary notwithstanding, if the Employee has received a lump sum payout of the Actuarial Equivalent value of his vested monthly pension benefit in accordance with Section 11.6, then his right, if any, to a further pension benefit upon rehire shall be determined in accordance with the provisions of Section 11.6(b). SECTION 7.5 EMPLOYEES NOT ACTIVELY AT WORK. The absence of a Covered Employee from active work at the time such Covered Employee would be eligible to retire under the Plan shall not preclude his retirement without return to active work. SECTION 7.6 NOTIFICATION OF ADDRESS. Each Covered Employee or other person entitled to a retirement benefit under the Plan shall file with the Committee from time to time, in writing, his post office address. SECTION 7.7 UNCLAIMED BENEFITS. If at, after, or during the time when a benefit hereunder is payable to any Covered Employee, Beneficiary or other distributee, the Committee or the Trustee shall mail by registered or certified mail to such Covered Employee, Beneficiary or other distributee at his last known -64- 69 address a written demand for his then address, and if such Covered Employee, Beneficiary or distributee shall fail to furnish the same to the Trustee within 4 years from the mailing of such demand, then such Covered Employee, Beneficiary or other distributee shall forfeit his right to such benefit. Such forfeited benefit shall be reinstated if a claim for the same is made by the Covered Employee, Beneficiary, or other distributee at any time thereafter. SECTION 7.8 QUALIFIED DOMESTIC RELATIONS ORDERS. If the Plan shall receive a domestic relations order, the following shall apply: (a) The Committee shall promptly notify the Employee and any "Alternate Payee" (as hereinafter defined) of the Plan's receipt of such order, the provisions of this Section, and any other Plan procedures for determining the qualified status of such order under ERISA. (b) Within a reasonable time after receipt of such order, the Committee shall request the Employee and each Alternate Payee to notify the Plan whether they consent to or contest the validity of such order under ERISA. (c) Thereafter, within a reasonable period of time after such persons have had an opportunity to consent to or contest the domestic relations order, including indicating, where appropriate, the reasons for their position, the Committee shall make a determination of whether such order is a "Qualified -65- 70 Domestic Relations Order" (as hereinafter defined) and notify the Employee and each Alternate Payee of such determination. In making such determination, the Committee may apply to a court of competent jurisdiction for its determination. (d) During any period in which the issue of whether a domestic relations order is a Qualified Domestic Relations Order is being determined (by the Committee, by a court of competent jurisdiction, or otherwise), the Committee shall segregate on its books in a separate account in the Plan or in an escrow account, the amounts which would have been payable to the Alternate Payee during such period if the order had been determined to be a Qualified Domestic Relations Order. Thereafter, the following shall apply: (1) If within 18 months, beginning with the date on which the first payment would be required to be made under the Qualified Domestic Relations Order, the order (or modification thereof) is determined to be a Qualified Domestic Relations Order, the Committee shall pay the segregated amounts (plus any interest thereon, if applicable) to the person or persons entitled thereto. (2) If within 18 months, beginning with the date on which the first payment would be required to be made under the Qualified Domestic Relations Order, it is determined that the order is not a Qualified Domestic Relations Order, or the issue as to whether the order is a Qualified Domestic Relations Order is not resolved, then the Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. If the determination is made after the close of the 18-month period that the order is a Qualified Domestic Relations Order, such order shall be applied prospectively only. (e) To the extent that the Plan and any fiduciary under the Plan acts in accordance with the provisions of this -66- 71 Section in treating a domestic relations order as being (or not being) a Qualified Domestic Relations Order, or in taking action under subsection (d), the Plan's obligation to the Employee and to each of his Alternate Payees hereunder shall be discharged to the extent of any payment made pursuant hereto. (f) For purposes hereof, the following terms have the following meanings: (1) "Qualified Domestic Relations Order" means a domestic relations order that qualifies under Section 206(d) of ERISA. (2) "Alternate Payee" means any spouse, former spouse, child or other dependent of an Employee who is recognized by a domestic relations order as having a right to receive all or a portion of the benefits payable under the Plan with respect to the Employee. SECTION 7.9 LIMITATIONS ON DISTRIBUTIONS. The following limitations on any distribution provisions of the Plan are effective for Plan Years beginning after December 31, 1984: (a) LIMITS ON SETTLEMENT OPTIONS. Distributions, if not made in a lump sum, may only be made over: (1) the life of the Employee; (2) the life of the Employee and his designated beneficiary, in accordance with the terms of this Plan; (3) a period certain not extending beyond the life expectancy of the Employee; (4) a period certain not extending beyond the joint and last survivor expectancy of the Employee and a designated beneficiary; or (5) any combination of the foregoing. -67- 72 (b) MINIMUM AMOUNTS TO BE DISTRIBUTED. If the Employee's entire interest is to be distributed in other than a lump sum or an annuity for the lifetime of the Employee or for the lifetime of the Employee and his designated beneficiary, then the amount to be distributed each year must be at least an amount equal to the quotient obtained by dividing the Employee's entire interest by the life expectancy of the Employee or joint and last survivor expectancy of the Employee and designated beneficiary. Life expectancy and joint and last survivor expectancy are computed by the use of the return multiples contained in Section 1.72-9 of the Income Tax Regulations. For purposes of this computation, an Employee's life expectancy may be recalculated no more frequently than annually; however, the life expectancy of a non-spouse beneficiary may not be recalculated. If the Employee's Spouse is not the designated beneficiary, the method of distribution selected must assure that at least 50% of the present value of the amount available for distribution is anticipated to be paid within the life expectancy of the Employee and the amounts payable after the Employee's death shall not at any time exceed the applicable percentage of the annuity payment for such period which would have been payable to the Employee using the Table set forth in Q&A A-6 of Section 1.401(a)(9)-2 of Regulations under the Code. (c) DISTRIBUTIONS TO 5% OWNERS PRIOR TO JANUARY 1, 1989 AND TO ALL EMPLOYEES THEREAFTER. The Accrued Benefit of a 5% owner prior to January 1, 1989, and thereafter of all Employees who attain age 70-1/2 after December 31, 1987, must be distributed -68- 73 or commence to be distributed, no later than the first day of April following the calendar year in which such individual attains age 70-1/2. For Plan Years prior to January 1, 1989, if an individual becomes a 5% owner after he attains age 70-1/2, the account balance and/or Accrued Benefit must be distributed, or commence to be distributed, no later than the first day of April following the calendar year in which such individual becomes a 5% owner. An Employee is treated as a 5% owner for purposes of this Section if such Employee is a 5% owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 but without regard to whether the Plan is top heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66-1/2 or any subsequent Plan Year. Once distributions have begun to a 5% owner under this Section, they shall continue to be distributed, even if the Employee ceases to be a 5% owner in a subsequent year. (d) DISTRIBUTIONS TO NON-5% OWNERS PRIOR TO JANUARY 1, 1989. Distribution to an Employee other than a person who becomes a 5% owner on or before December 31, 1987, must commence no later than the first day of April following the calendar year in which the later of termination of employment or age 70-1/2 occurs except that as of April 1, 1989, distribution to such an Employee must commence no later than the first day of April following the calendar year in which the Employee attains age 70-1/2. -69- 74 (e) DEATH DISTRIBUTION PROVISIONS. Upon the death of an Employee, the following distribution limitations shall take effect: (1) If the Employee dies after distribution of his or her interest has commenced, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Employee's death. (2) If the Employee dies before distribution of his or her interest begins, distribution of the Employee's entire interest shall be completed by December 31 of the calendar year containing the 5th anniversary of the Employee's death, except to the extent that an election is made to receive distributions in accordance with (A) or (B) below: (A) if any portion of the Employee's interest is payable to (or for the benefit of) a designated beneficiary, distributions may be made over the life or over a period certain not greater than the life expectancy of the designated beneficiary on or before December 31 of the calendar year immediately following the calendar year of the Employee's death; or (B) if the designated beneficiary is the Employee's surviving Spouse, the date distributions are required to begin in accordance with (A) above shall not be earlier than the later of: (i) December 31 of the calendar year immediately following the calendar year in which the Employee died, or (ii) December 31 of the calendar year in which the Employee would have attained age 70-1/2. If the Employee has not made an election pursuant to this paragraph (e) by the time of his or her death, the Employee's designated beneficiary must elect the method of distribution no later than the earlier of (i) December 31 of the calendar year in which distributions would be required to begin under this Section, or -70- 75 (ii) December 31 of the calendar year which contains the 5th anniversary of the date of death of the Employee. If the Employee has no designated beneficiary, or if the designated beneficiary does not elect a method of distribution, distribution of the Employee's entire interest must be completed by December 31 of the calendar year containing the 5th anniversary of the Employee's death. For purposes of subsection (e), if the surviving spouse dies after the Employee, but before payments to such spouse begin, the provisions of subsection (e), with the exception of subsection (B) therein, shall be applied as if the surviving spouse were the Employee. (3) For purposes of (2) above, payments will be calculated by use of the return multiples specified in Section 1.72-9 of the Income Tax Regulations. Life expectancy of a surviving Spouse may be recalculated annually. However, in the case of any other designated beneficiary, such life expectancy will be calculated at the time payment first commences without further recalculation. (4) For purposes of (1), (2), and (3) above, any amount paid to a child of the Employee will be treated as if it had been paid to the surviving Spouse if the amount becomes payable to the surviving Spouse when the child reaches the age of majority. (f) TRANSITIONAL RULE. The limitations contained in this Section shall not apply to any designation of a method of distribution made in writing by an Employee prior to January 1, 1984, if: (1) The distribution by the trust is one which would not have disqualified such trust under Section 401(a)(9) of the Internal Revenue Code as in effect prior to amendment by the Deficit Reduction Act of 1984; (2) The distribution is in accordance with a method of distribution designated by the Employee whose interest in the trust is being distributed or, if the Employee is deceased, by a beneficiary of such Employee; -71- 76 (3) Such designation was in writing, was signed by the Employee or the beneficiary, and was made before January 1, 1984; (4) The Employee had accrued a benefit under the Plan as of December 31, 1983; and (5) The method of distribution designated by the Employee or the beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Employee's death, the beneficiaries of the Employee listed in order of priority. (6) If a designation is revoked, any subsequent distribution must satisfy the requirements of Section 401(a)(9) of the Code and the regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the trust must distribute, by the end of the calendar year following the calendar year in which the revocation occurs, the total amount not yet distributed which would have been required to have been distributed to satisfy Section 401(a)(9) of the Code and the regulations thereunder, but for the election made prior to January 1, 1984. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in Section 1.401(a)(9)-2 of the Income Tax Regulations. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case in which an amount is transferred or rolled over from 1 plan to another plan, the rules in Q&A J-2 and Q&A J-3 of Section 1.401(a)(9)-1 of the Income Tax Regulations shall apply. (g) BENEFIT COMMENCEMENT. The payment of benefits to the Employee shall begin not later than the 60th day after the latest of the close of the Plan Year in which he attains Normal Retirement Age, the 10th anniversary of his participation in the Plan occurs, or he terminates his service with the Association and any Related Company, unless such Employee -72- 77 otherwise elects in a writing submitted to the Committee describing his benefit and the later date on which he elects that it shall commence. In no event may he exercise any election which will cause benefits payable with respect to the Employee in the event of his death to be more than "incidental" within the meaning of Regulation Section 1.401-1(b)(1)(i). 7.10 ELIGIBLE ROLLOVER DISTRIBUTIONS. (a) This Section 7.10 applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section 7.10, a Distributee may elect, at the time and in the manner prescribed by the Pension Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. (b) An "Eligible Rollover Distribution" is any distribution of all or any portion of the accrued benefit to the credit of the Distributee, except that an Eligible Rollover Distribution does not include any distribution that is 1 of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of 10 years or more, any distribution to the extent such distribution is required under Section 401(a)(9) of the Code, and the portion of any distribution that is not -73- 78 includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (c) An "Eligible Retirement Plan" is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (d) A "Distributee" includes an Employee or former Employee. In addition, the Employee's or former Employee's Surviving Spouse and the Employee's or former Employee's Spouse or former Spouse who is the Alternate Payee under a Qualified Domestic Relations Order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the Spouse or former Spouse. (e) A "Direct Rollover" is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. -74- 79 ARTICLE VIII ------------ TOP HEAVY PROVISIONS -------------------- If in any Plan Year commencing on or after January 1, 1984, the Plan is determined to be a Top Heavy Plan, the following provisions shall become effective for such Plan Year and shall supersede any other provisions of the Plan which otherwise would apply for that Plan Year. SECTION 8.1 MINIMUM VESTING. If in any Plan Year the Plan is determined to be a Top Heavy Plan, then notwithstanding the provisions of Section 5.1 of the Plan, any Covered Employee who has an Hour of Service during any Plan Year when the Plan is a Top Heavy Plan shall have a nonforfeitable right to a percentage of his Accrued Benefit derived from Employer contributions determined by multiplying the monthly amount of Termination of Employment benefits the Employee is entitled to receive under Section 5.1 of this Plan or, if greater, under Section 8.2, by the greater of the percentages in Section 5.1 or the following percentages: Years of Service Nonforfeitable Percentage ---------------- ------------------------- Less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% If the Plan subsequently ceases to be a Top Heavy Plan, the vesting schedule hereinabove set forth in this Section 8.1, shall continue to apply in determining the Termination of -75- 80 Employment benefit of any Employee who had at least 5 (3 for any Employee with at least 1 Hour of Service on or after January 1, 1989) Years of Service as of the end of the last Plan Year in which the Plan was a Top Heavy Plan. For all other Employees, the requirements set forth in Section 5.1 of the Plan for eligibility for Termination of Employment benefits shall be applicable after the end of said Plan Year in determining the nonforfeitable percentage of such Employee's accrued benefit, except that in no event shall the Employee's nonforfeitable percentage of his accrued benefit (determined as of the date the Plan ceases to be a Top Heavy Plan) be less than such nonforfeitable percentage computed under the Plan without regard to such change from Top Heavy Plan status. SECTION 8.2 MINIMUM BENEFIT. If in any Plan Year the Plan is determined to be a Top Heavy Plan, then notwithstanding the provisions of Section 4.2, the minimum monthly amount of any pension payable in accordance with Article IV to any Employee participating in the Plan, payable monthly in the form of a Single Life Annuity beginning at the Employee's Normal Retirement Age, shall be equal to the product of (a) 2% of such Employee's Final Average Monthly Earnings, multiplied by (b) each of his first 10 years of Minimum Benefit Service; provided, however, that for purposes of calculating Final Average Monthly Earnings for this Section 8.2, the following years shall be excluded: (a) Plan Years not included in a Year of Service; and (b) Plan Years which begin after the close of the last Plan Year in which the Plan Year was a Top Heavy Plan. In the event the Employee elects Immediate -76- 81 Early Retirement benefits as provided in Section 4.3, or immediate Deferred Vested Pension benefits within the meaning of Section 5.1, or if the Employee elects the 100% Joint Annuitant Option or is deemed to elect Qualified Joint and Survivor Annuity benefits, as provided in Section 4.5 of the Plan, the actuarial adjustments to his Single Life Annuity form of benefit payable at Normal Retirement Age, as provided in such Sections, shall be applicable. Anything to the contrary in this Plan notwithstanding, if at any time when the Plan is a Top Heavy Plan, the Association also maintains a Top Heavy defined contribution plan, then for Non-Key Employees participating in both this plan and the defined contribution plan, the defined benefit minimum provided under this Section 8.2 shall be offset by any benefit provided by the defined contribution plan. SECTION 8.3 IMPACT UPON MAXIMUM BENEFITS. For any Plan Year in which the Plan is a Top Heavy Plan, Section 4.2(a) shall be read by substituting "1.0" for "1.25" wherever it appears therein. SECTION 8.4 TOP HEAVY PLAN DEFINED. (a) The Plan shall be deemed to be a "Top Heavy Plan" based upon the following: (1) GENERAL. This Plan shall be deemed to be a Top Heavy Plan with respect to any Plan Year, if as of the Determination Date (as defined in subsection (3)(d) hereof), (A) the Plan is not required to be included in an Aggregation Group with other plans and the present value of the cumulative accrued benefits under the Plan when considered by itself for Key Employees -77- 82 exceeds 60% of the present value of the accrued benefits under the Plan for all Employees and the Plan is not included in a permissive Aggregation Group that is not a Top Heavy Group (as defined in subsection (2)(A) below), and such group, together with any permissible Aggregation Plans is a Top Heavy Group (as defined in subsection (2)(B) below). (2) AGGREGATION. For purposes of this Section 5: (A) Aggregation Group. (i) REQUIRED AGGREGATION. The term "Aggregation Group" means: (I) Each plan (including plans terminated within the 5-year period ending on the Determination Date) of the Association in which a Key Employee is a participant, and (II) Each other plan of the Association which enables any plan described in (I) to meet the requirements of Section 401(a)(4) or 410 of the Code. (ii) PERMISSIBLE AGGREGATION. The Association may treat any plan not required to be included in an Aggregation Group under subsection (i) as being part of such group, if such group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code with such plan being taken into account. (B) TOP HEAVY GROUP. The term "Top Heavy Group" means any Aggregation Group if: (i) The sum (as of the Determination Date) of: (I) The present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in such group, and (II) The aggregate of the accounts of Key Employees under all defined contribution plans included in such group, -78- 83 (ii) Exceeds 60% of a similar sum determined for all Employees. (3) Special Rules. -------------- (A) DISTRIBUTIONS DURING LAST 5 YEARS. For purposes of this Section 8.4, in determining the present value of the cumulative aggregate benefit for any Employee, or the amount of any account of any Employee, such present value or amount shall be increased by the aggregate distributions made with respect to such Employee under the Plan during the 5-year period ending on the Determination Date. (B) ROLLOVER CONTRIBUTIONS. Except to the extent provided in Regulations issued pursuant to Code Section 416, any rollover contributions (or similar transfer) initiated by the Employee and made after December 31, 1983, to a plan shall not be taken into account with respect to the transferee plan for purposes of determining whether such plan is a Top Heavy Plan (or whether any Aggregation Group which includes such plan is a Top Heavy Group). (C) EMPLOYEES WHO DO NOT PERFORM AN HOUR OF SERVICE FOR 5 YEARS. If an Employee has not performed an Hour of Service during the 5-year period ending on the Determination Date, any Accrued Benefit for such Employee and the account balance of such Employee shall not be taken into account. (D) DETERMINATION DATE. The Determination Date is the last day of the preceding Plan Year, except that in the case of the first Plan Year of any plan, it shall be the last day of such Plan Year. If more than 1 plan is aggregated, the present value of accrued benefits shall be determined separately under each plan as of each plan's Determination Date and the plans shall then be aggregated by adding the results of each plan as of the Determination Dates for such plans that fall within the same calendar year. (E) DEFINED BENEFIT PLANS. In determining the present value of accrued benefits for all defined benefit plans, the accrued benefit for each current Employee shall be computed as if the Employee voluntarily terminated service as of the most recent Valuation Date which is within a -79- 84 12-month period ending on the Determination Date. For purposes hereof: (i) In the first Plan Year of any plan, the accrued benefit for a current participant shall be determined as if the participant terminated service as of the Determination Date (the last day of the Plan Year) and for any subsequent year the accrued benefit for such participant shall be determined as if the individual terminated service as of the most recent Valuation Date which is within a 12-month period ending on the Determination Date. (ii) The Valuation Date shall be the same Valuation Date as used in computing plan costs for minimum funding requirements, regardless of whether a valuation is performed for the year. (iii) The following assumptions shall apply: (I) An interest rate assumption of 5%. (II) A post-retirement mortality assumption based on the UP 1984 Mortality Table, without adjustment for sex. (III) A pre-retirement mortality assumption based on the UP 1984 Mortality Table, without adjustment for sex. (IV) A future increase in cost-of-living in the maximum dollar amount as permitted by Section 415 of the Code. (iv) The present value shall be determined based upon a benefit payable commencing at Normal Retirement Age (or attained age, if later). (v) Subsidized Early Retirement benefits and subsidized benefit reductions shall not be taken into account unless they are non- proportional subsidies. (F) DEFINED CONTRIBUTION PLANS. In a defined contribution plan, the present value of -80- 85 accrued benefits as of the Determination Date for any individual is the sum of: (i) The account balance of the individual as of the most recent Valuation Date occurring within a 12-month period ending on the Determination Date, and (ii) An adjustment for contributions due as of the Determination Date. In the case of a plan not subject to the minimum funding requirements of Section 412 of the Code, the adjustment in (ii) is generally the amount of any contributions actually made after the Valuation Date, but on or before the Determination Date; provided, however, that in the first Plan Year of the Plan, such adjustment shall also reflect the amount of any contributions made after the Determination Date that are allocated as of a date in that first Plan Year. If the plan is subject to said minimum funding requirements, the account balance in (i) shall include contributions that would be allocated as of a date not later than the Determination Date, even though those amounts are not yet required to be contributed, such as contributions waived in prior years and contributions not paid that result in a funding deficiency. In addition, an adjustment shall be made to (ii) to reflect the amount of any contribution actually made (or due to be made) after the Valuation Date, but before the expiration of the extended payment period permitted by Code Section 412(c)(10). For purposes of this paragraph (F) the "Valuation Date" shall be (i) the same Valuation Date as used in computing plan costs for minimum funding purposes, if the plan is subject to said minimum funding requirements, or (ii) if the plan is not subject to minimum funding requirements, the date established by the plan for valuing and adjusting all account balances. (G) COVERED EMPLOYEE WHO CEASE TO BE KEY EMPLOYEES. If any Covered Employee is a Non-Key Employee with respect to any plan for any Plan Year, but he was a Key Employee with respect to such plan for any prior Plan Year, any Accrued Benefit for such Covered Employee and the account of such Covered Employee shall not be taken into account. -81- 86 (H) ACCRUALS. Solely for the purpose of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is Top Heavy (within the meaning of Section 416(g) of the Code) the accrued benefit of an Employee other than a Key Employee shall be determined under the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Association and all Related Companies, or if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the Code. ARTICLE IX ---------- FINANCING --------- SECTION 9.1 FUND. The Association shall execute a trust agreement with a Trustee selected by the Board of Directors of the Association to manage and operate the Fund, and to receive, hold and disburse such contributions, interest and other income as may be necessary to pay the retirement benefits under this Plan. The Committee will inform the Trustee of the annual estimates of the future benefits to be paid from the Fund with such other information as is deemed necessary for the Trustee to be able to coordinate investment policy with Plan needs. SECTION 9.2 ASSOCIATION CONTRIBUTIONS. The Association intends that this shall be a permanent Plan for the exclusive benefit of its Employees and their beneficiaries and intends to make such annual contributions to the Fund in an amount not less than the minimum requirements as set forth in the Funding Standard Account set forth in the actuary's valuation report for the applicable period of time. -82- 87 The Plan Trustee shall pay out of the Fund all taxes which may be levied or assessed upon or in respect to such Fund, or any money, property or securities forming a part thereof, and all expenses of administration. Reasonable counsel fees, fees of an actuary, and premiums required by the Pension Benefit Guaranty Corporation in, or in connection with, the administration of the Fund may also be paid out of the Fund. The Association may, at its option, at any time, and from time to time, reimburse the Fund for any such fees, expenses and other charges, but shall be under no obligation to do so. SECTION 9.3 EMPLOYEE CONTRIBUTIONS. No contributions by Employees will be made under the Plan after December 31, 1975. SECTION 9.4 IRREVOCABILITY. The Association shall have no right, title or interest in the contributions made by it to the Fund and no part of the Fund shall revert to the Association; provided, however, if the Plan is amended and such amendment is not approved by the Internal Revenue Service, the contributions made by the Association to fund the additional benefits provided by the amendment shall be returned to the Association within 1 year of the date of denial of qualification of the amendment. ARTICLE X --------- ADMINISTRATION -------------- SECTION 10.1 RESPONSIBILITY FOR ADMINISTRATION. The Association shall be the Plan Administrator for purposes of the Employee Retirement Income Security Act of 1974, but the general -83- 88 administration of the Plan and the responsibility for carrying out the provisions thereof shall be vested in a Pension Committee of no less than 3 members who shall be the named fiduciaries for the purpose of Plan administration under ERISA. The Board of Directors of the Association shall from time to time designate the members of the Committee. The Committee shall appoint its own Chairman and Secretary, and shall act by a majority of its members, with or without a meeting. The Secretary or an Assistant Secretary of the Association shall from time to time notify the Trustee of the appointment of members of the Committee and alternates and of the appointment of the Chairman and Secretary of the Committee, upon which notice the Trustee shall be entitled to rely. The Committee shall have full power and authority to administer the Plan and to interpret its provisions. SECTION 10.2 FUNCTION OF THE COMMITTEE. It shall be the function of the Committee to administer the Plan, exclusive of those functions assigned to the Trustee, but it may allocate and delegate its responsibilities to others where deemed appropriate for the effective administration of the Plan. The Committee shall, among other things, have the following rights and powers: (a) To adopt and prescribe regulations and procedures to be followed by a Covered Employee in filing applications for benefits and for the furnishing and verification of evidence and proofs necessary to establish a Covered Employee's (joint annuitant, beneficiary) rights to benefits under the Plan. -84- 89 (b) To develop procedures for the establishment and maintenance of records of Years of Service, Credited Service, earnings and such other information as may be necessary to determine a Covered Employee's benefit under the Plan. (c) To make findings of facts and determinations as to the rights of any Covered Employee applying for Retirement Benefits and to afford any such Covered Employee dissatisfied with any such findings or determination, the right to a hearing thereon. (d) To obtain from the Association, the Trustee and from the Covered Employee, such information as shall be necessary for the proper administration of the Plan. (e) To establish appropriate procedures for authorizing the Trustee to make benefit payments from the Fund to persons entitled to benefits under the Plan. (f) To interpret the Plan and to decide finally and conclusively any questions that may arise in connection with the Plan. (g) To consult with the Trustee on investment policy objectives as related to Plan needs. (h) To provide Covered Employees, Retired Employees, Vested Employees, beneficiaries, the Secretary of Labor, the Secretary of Treasury and the Pension Benefit Guaranty Corporation with such information as is required to be furnished -85- 90 by the Employee Retirement Income Security Act of 1974, with the Chairman of the Committee authorized to sign any forms on behalf of the Plan Administrator. (i) The Committee shall designate an agent for service of any legal process with respect to the Plan. SECTION 10.3 LIMITATION OF LIABILITY. The Committee, the Board of Directors of the Association and its officers shall be entitled to rely upon all tables, valuations, certificates and reports furnished by any actuary, accountant, or the Trustee and upon the opinions given by any legal counsel, in each case selected by the Association. ARTICLE XI ---------- MISCELLANEOUS PROVISIONS ------------------------ SECTION 11.1 RIGHT OF ASSOCIATION. The right of the Association to employ, discipline or discharge Employees shall not be affected by reason of any of the provisions of the Plan. SECTION 11.2 FACILITY OF PAYMENT. In the event that it shall be found that any Retired Employee to whom a retirement benefit is payable is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may be paid to the spouse, parent, brother or sister or other person deemed by the Committee to have incurred expense for such Retired Employee. Any such payment shall be a payment for the account of the Retired Employee and shall be a -86- 91 complete discharge of any liability of the Plan therefor. No heir or personal representative of a deceased Employee shall have any claim to a retirement benefit payable to such Employee except such as is payable under the terms of the Plan. SECTION 11.3 NON-ALIENATION OF BENEFITS. The Fund shall not in any manner be liable for or subject to the debts or liabilities of any Covered Employee, Vested Employee or Retired Employee. No right or benefit under the Plan shall be subject at any time or in any manner to sale, alienation, transfer, assignment, pledge or encumbrance of any kind, including a domestic relations order, unless such order is determined to be a qualified domestic relations order, as defined in Section 414(p) of the Code, or any domestic relations order entered before January 1, 1985. If under any such order payments are required to be made to an alternate payee within the meaning of Section 206(d)(3)(D) of ERISA, for purposes of determining present values, the Plan shall make determinations on an Actuarially Equivalent basis. SECTION 11.4 EVIDENCE OF SURVIVAL. The Committee shall have the right to require satisfactory evidence that a Retired Employee or beneficiary is living on each and every date when a retirement benefit is due such Retired Employee or beneficiary. In the absence of such evidence when required by the Committee, the benefits otherwise due shall not be paid until such evidence shall have been received. -87- 92 SECTION 11.5 BENEFICIARY. Except as otherwise provided in the Plan, each Covered Employee shall designate a beneficiary in accordance with the Plan to whom any death benefits payable under the Plan on behalf of such Covered Employee shall be paid. Such designation shall become effective only when it is filed with the Committee in writing on a form prescribed by the Committee, and if any person other than the Employee's Spouse is designated shall only be effective if made pursuant to a Qualified Election under Section 4.5 hereof. Except as otherwise provided in the Plan, if a Covered Employee dies without a surviving Spouse and has failed to effectively designate a beneficiary or if the beneficiary predeceases the Covered Employee or dies before receiving all the death benefits payable to said beneficiary, then payment of sums due under the Plan shall be made to the deceased Covered Employee's estate. The Committee's decision shall be final and binding on all persons in interest hereunder and payment of the deceased Employee's death benefit in the manner so provided shall constitute a full discharge of the liability of the Fund to the extent of such payment. SECTION 11.6 MODIFICATION IN MODE OF PAYMENT. (a) If the lump sum Actuarial Equivalent value of any monthly pension benefit payable to a retired or separated Employee is not more than and at the time of any prior distribution did not exceed $3,500 (or any lesser amount as may, by Regulations of the Secretary of the Treasury, be established as -88- 93 the maximum amount that may be paid to the Employee without the Employee's consent), the Committee shall direct the Trustee to distribute the Actuarial Equivalent of the Employee's pension benefit to the Employee forthwith in a lump sum. Anything herein to the contrary notwithstanding, each Participant entitled to a benefit that has a lump sum Actuarial Equivalent value in excess of $3,500, who has terminated employment prior to September 1, 1995 (including a Participant who is not actively employed by the Association due to a disability incurred on or after January 1, 1994), and whose benefit is not in pay status as of that date, each surviving Spouse of a Participant who as of August 31, 1995, is entitled to a Death Benefit which is not in pay status as of that date, and each Alternate Payee who as of August 31, 1995, is entitled to a portion of the Accrued Benefit of a Participant, and whose benefit is not in pay status as of that date, may elect in writing on or after September 1, 1995, and prior to November 15, 1995, to receive either a lump sum distribution of his pension benefits or to commence immediate payment of his benefits in any Actuarially Equivalent form of payment otherwise available to such person under the Plan. In such event, the Committee shall either direct the Trustee or Insurance Company to distribute the Actuarially Equivalent value of such person's pension benefit to the Participant, Spouse or Alternate Payee, as applicable, forthwith in a lump sum or to forthwith commence payment of his benefits in the form elected by the Participant, Spouse or Alternate Payee, as applicable; otherwise, the Committee will make distribution of the pension of such Participant, Spouse or Alternate Payee, as applicable, in accordance with the remaining terms of this Plan. Any distribution to a Participant in excess of $3,500 in a form other than a Qualified Joint and Survivor Annuity shall be subject to the consent of the Participant's Spouse, if he is then married, by a Qualified Election which waives the right to an immediate Actuarially Equivalent Qualified Joint and Survivor Annuity. For purposes hereof: -89- 94 (1) The Actuarially Equivalent present value of a lump sum payment shall be calculated as follows: (A) prior to August 1, 1995, by using such actuarial tables and interest rate assumptions adopted from time to time by the Pension Benefit Guaranty Corporation (for valuation of single employer pension plans not receiving a PBGC Notice of Sufficiency) as in effect as of the beginning of the Plan Year when the payment is to be made to determine the Actuarially Equivalent lump sum value of an Employee's benefits; provided, however, that in no event shall any Employee receive a lesser lump sum payment than the lump sum value of the benefit the Employee accrued as of December 31, 1989 when computed based on the said Actuarial Equivalencies of the PBGC as in effect 30 days prior to the time that a payment is to be made; and (B) on and after August 1, 1995, the lump sum Actuarial Equivalent Value for any Plan Year shall be calculated based on the following: (i) the table prescribed by the Secretary of Treasury pursuant to Section 415(b)(2)(E)(v) of the Code (the "Applicable Mortality Table"); and (ii) the annual rate of interest on 30-year Treasury securities for November of the Plan Year preceding the date of the distribution (the "Applicable Interest Rate"). (2) The Actuarial Equivalent form of payment of a person under age 55 who requests immediate commencement of his benefits prior to attaining age 55 in a form other than a lump sum shall be determined based on an actuarial reduction from the amount of the benefit of such person payable in the form he elected at age 55 as otherwise determined under the terms of the Plan (Section 4.3 or 18.1, as applicable), such reduction to be computed on the basis of the 1984 Unisex Pension Mortality Table, without adjustment for sex, and at an interest rate of 7% per annum for all benefits accrued under this Plan, other than benefits payable under Section 18.1, and at an interest rate of 8% for benefits accrued under the Bay Plan and payable pursuant to Section 18.1. If the present value of an Employee's vested Accrued Benefit is zero, the Employee shall be deemed to have received a distribution of such vested Accrued Benefit, without any action of the Board, immediately upon termination of employment. Former Employees who are eligible for a Deferred Vested Pension pursuant to the Plan who have not begun receiving a payment of the benefit before January 1, 1990 and which benefit has a value that is not more than and at the time of any prior distribution did not exceed $3,500, determined as described in this Section 11.6, shall receive the benefit in a lump sum as soon as practicable after January 1, 1990. -90- 95 (b) If an Employee who has received a lump sum payment in accordance with the provisions of the preceding paragraph is subsequently rehired, he shall be eligible for a further pension benefit upon subsequent retirement, calculated as if the pensioner were then first retired, and based upon his Credited Service and Final Average Monthly Earnings as determined under Articles I and VI hereof, except that any such monthly pension benefit due upon subsequent retirement shall be reduced by the original monthly benefit amount upon which the Actuarially Equivalent lump sum payment was calculated, unless the Participant repays, before he incurs 5 consecutive 1-year Breaks in Service following the date of distribution, the amount distributed to him together with 5% interest compounded annually on the full amount of the distribution to him computed from the date of distribution to him to the date of repayment. ARTICLE XII ----------- AMENDMENT --------- SECTION 12.1 RIGHT TO AMEND. The Association acting through its Board of Directors, reserves and shall have the right at any time and from time to time to terminate, modify or amend in whole or in part any or all of the provisions of the Plan; provided, however, that except as may be required by the regulatory provisions of ERISA for the purpose of meeting the conditions for qualification, no modification or amendment of any of the provisions of the Plan or its operation may be made if, by reason of such modification or amendment, any Covered Employee, -91- 96 Vested Employee, Retired Employee or beneficiary would be deprived without his consent of the benefits then accrued with respect to him to which, apart from such modification or amendment, he would be entitled to under the Plan. Except to the extent permitted by applicable law, effective for amendments made after July 30, 1984, no amendment to the Plan (including a change in the actuarial basis for determining optional or early retirement benefits) shall be effective to the extent that it has the effect of decreasing an Employee's accrued benefit (except to the extent permitted under Section 412(c)(8) of the Code). For purposes of this paragraph, a Plan amendment which has the effect of (a) eliminating or reducing an Early Retirement Benefit or a retirement-type subsidy, or (b) eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to an Employee who satisfies (either before or after the amendment) the pre-amendment conditions for the subsidy. For purposes hereof, a retirement-type subsidy is a subsidy that continues after retirement, but does not include a qualified disability benefit, a medical benefit, a social security supplement, a death benefit (including life insurance), or a plant shutdown benefit (that does not continue after retirement age). Furthermore, no amendment to the Plan shall have the effect of decreasing an Employee's vested interest determined without regard to such amendment as of the later of the date such amendment is adopted, or becomes effective. -92- 97 Furthermore, no amendment to the Plan shall have the effect of decreasing an Employee's vested interest determined without regard to such amendment as of the later of the date such amendment is adopted, or becomes effective. No amendment shall change the vesting schedule, unless each Employee with 3 or more Years of Service (5 or more Years of Service if the Employee does not complete at least 1 Hour of Service on or after January 1, 1989), is permitted to elect to have his vested percentage computed without regard to such amendment. The period during which the election may be made shall commence on the date the amendment is adopted and shall end as of the latest of: (a) 60 days after the amendment is adopted; (b) 60 days after the amendment becomes effective; or (c) 60 days after the Employee is issued a written notice of the amendment by the Committee. SECTION 12.2 NON-DIVERSION OF ASSETS. None of the assets of the Fund shall by reason of any such modification or amendment be used for or diverted to any purpose other than for the exclusive benefit of the Covered Employees, Vested Employees, Retired Employees and their beneficiaries. No such modification or amendment shall be such as to cause the main purpose of the Plan to be other than the provision of retirement benefits. No such amendment or modification shall operate to recapture for the Association any contributions previously made by the Association to the Fund. -93- 98 SECTION 12.3 MERGER OF PLAN. If the Plan is amended to provide a merger or consolidation with, or the transfer of assets or liabilities to, another retirement plan which is qualified under the provisions of Section 401 of the Internal Revenue Code of 1954, as amended, each Covered Employee must be entitled to receive a benefit immediately after the merger, consolidation or transfer which is at least equal to the benefit which he would have been entitled to receive immediately before the merger, consolidation or transfer if the Plan had been terminated at that time. ARTICLE XIII ------------ TERMINATION OF THE PLAN ----------------------- SECTION 13.1 GENERAL. (a) Anything in this Plan to the contrary notwithstanding, effective as of the "Cessation Date" as hereinafter defined, and provided that written notice is given to each Participant, each Beneficiary of a deceased Participant, each alternate payee and each employee organization that currently represents any group of Participants in the Plan, pursuant to Act Section 204(h) at least 15 days prior to the Cessation Date, (i) no further benefits shall accrue to any Participant under this Plan; (ii) no Participant shall earn any additional Years of Service or Credited Service or have any increase in his Final Average Monthly Earnings taken into account for purposes of determining his Accrued Benefit; (iii) no employee who is not a Participant in the Plan on the Cessation Date shall thereafter -94- 99 become a Participant; and (iv) each Participant who has an Accrued Benefit as of the Cessation Date shall be fully vested in his Accrued Benefit as of that date. For purposes hereof, the "Cessation Date" shall be the date established by resolution of the Pension Committee at least 15 days prior to the Cessation Date, which Cessation Date shall be as close to the Company Merger Effective Time as reasonably determinable by the Pension Committee. This Plan shall terminate effective 45 days after the Cessation Date (the "Termination Date"). The Committee shall: (1) Provide each Participant, each Beneficiary of a deceased Participant, each alternate payee, and each employee organization that currently represents any group of Participants in the Plan, a written notice of intent to terminate the Plan, stating that such termination is intended and the proposed Termination Date, such notice to be provided not less than 60 days and not more than 90 days before the proposed Termination Date. (2) Provide the Pension Benefit Guaranty Corporation ("PBGC") with the notice required by Section 4041(b)(2)(A) of ERISA not less than 120 days after the Termination Date. (3) No later than the notice referred to in paragraph (2) is provided to the PBGC, provide each Participant and Beneficiary under the Plan a notice of such person's benefit liabilities and the information used in determining such benefit liabilities. (4) In the absence of receipt of a timely notice of noncompliance from the PBGC under Section 4041(b)(2)(C) of ERISA and Regulations issued thereunder, commence final distribution of assets of the Plan in accordance with Section 4041(b)(3) and Section 4044 of ERISA and the provisions of this Section 13.1. (5) Provide the PBGC a notice certifying final distribution of the assets of the Plan within 30 days of completion of such distribution. -95- 100 Upon termination of the Plan, the interests of all affected Employees shall be fully vested and nonforfeitable (to the extent funded) and the amount of the Pension Fund assets held by the trustee or insurance company shall be allocated, subject to provision for expense of administration or liquidation and applicable law, for the following pension purposes and in the following manner and order to the extent of the sufficiency of such assets: (1) First: To provide retirement benefits to each Retired Employee and Vested Employee (beneficiary) equal to that portion of the Covered Employee's accrued benefit arising from such Covered Employee's Accumulated Contributions, less any retirement benefits he has received. (2) Second: (A) In the case of the benefit of an Employee or Beneficiary which was in pay status as of the beginning of the 3-year period ending on the termination date of the Plan, to each such benefit, based on the provisions of the Plan (as in effect during the 5-year period ending on such date) under which such benefit would be the least. For purposes of this sub-subparagraph, the lowest benefit in pay status during a 3-year period shall be considered the benefit in pay status for such period. (B) In the case of an Employee's or Beneficiary's benefit (other than a benefit described in sub-subsection (1)(A) hereof), which would have been in pay status as of the beginning of such 3-year period if the Employee had retired prior to the beginning of the 3-year period and if his benefits had commenced (in the form of a Single Life Annuity under Section 4.5(b) of the Plan) as of the beginning of such period, to each such benefit based on the provisions of the Plan (as in effect during the 5-year period ending on such date) under which such benefit would be the least. (3) Third, to all other benefits (if any) of individuals under the Plan guaranteed under ERISA -96- 101 (determined without regard to Section 4022(b)(5) of ERISA). (4) Fourth, to all other nonforfeitable benefits under the Plan. (5) Fifth, to all other benefits under the Plan. (b) For the purposes of Paragraph (a): (1) The amount allocated under any subparagraph of paragraph (a) with respect to any benefit shall be properly adjusted for any allocation of assets with respect to that benefit under a prior subparagraph of paragraph (a). (2) If the assets available for allocation under any subparagraph of paragraph (a) (other than subparagraph (4)) are insufficient to satisfy in full the benefits of all individuals which are described in that paragraph, the assets shall be allocated pro rata among such individuals on the basis of the present value (as of the termination date) of their respective benefits described in that subparagraph. (3) If there are assets available for allocation under subparagraph (4) of paragraph (a), but such assets are not sufficient to satisfy in full the benefits of such individuals described in that paragraph: (A) Except as provided in sub-subparagraph (B) below, the assets shall be allocated to the benefits of individuals described in such subparagraph (4) on the basis of the benefits of individuals which would have been described in such subparagraph (4) under the Plan as in effect at the beginning of the 5-year period ending on the date of Plan termination. (B) If the assets available for allocation under sub-subparagraph (A) are sufficient to satisfy in full the benefits described in such sub-subparagraph (without regard to this sub-subparagraph), then for purposes of sub-subparagraph (A), benefits of individuals described in such sub-subparagraph shall be determined on the basis of the Plan as amended by the most recent Plan amendment effective during such 5-year period under which the assets available for allocation are sufficient to satisfy in full the benefits of individuals described in -97- 102 sub-subparagraph (A) and any assets remaining to be allocated under such sub-subparagraph (A) shall be allocated under this sub-subparagraph (B) on the basis of the Plan as amended by the next succeeding Plan amendment effective during such period. (c) Anything herein to the contrary notwithstanding, if, within 5 years after the date of the merger referred to in Article XVII or within 5 years after the date of the merger referred to in Article XVIII, the Association terminates the Plan in accordance with Section 12.1 above, or the Plan is partially terminated, then the allocation provisions of Section 13.1(a) and (b) shall be modified in the following manner: (1) The Committee shall maintain data for at least 5 years after the merger referred to in Article XVIII, which data would be sufficient to create, at the time of such termination, the special schedule hereinafter described. (2) In the event of such termination, Section 4044 of ERISA shall be applied to the Plan as merged pursuant to Article XVIII, through the priority categories fully satisfied by the assets of the lowest funded Plan immediately prior to the mergers. (3) The assets in this Plan as merged shall then be allocated to the next priority category as a percentage of the value of benefits that would otherwise be allocated to that priority category. That percentage is the ratio of (A) the assets allocated to the first priority category not fully satisfied by the lowest funded Plan immediately prior to the merger to (B) the assets that would have been allocated had that priority category been fully satisfied. (4) Next, a schedule of benefits shall be formed listing Participants and scheduled accrued benefits. The scheduled accrued benefits of a Participant are the excess of the benefits provided on a termination basis with respect to any Participant from the Plan immediately prior to the mergers, over the benefits provided on a termination basis in paragraphs (2) and (3) above immediately after the mergers. After allocating the assets in accordance with paragraph (3), -98- 103 the assets shall be allocated to the schedule of benefits, as follows: (A) First, the assets shall be allocated to the scheduled benefits to the extent that the Participant would have benefits provided in paragraph (5) below if there were no scheduled benefits. (B) Then the assets shall be allocated to the scheduled benefits to the extent that the Participant would have benefits provided pursuant to paragraph (6) below if there were no scheduled benefits. These assets should be allocated first to those scheduled benefits that are in the highest priority category under Section 4044. In applying this paragraph (4), appropriate modification of the schedule of benefits shall be made to account for the fact that the Omni Plan merged with the Plan effective October 31, 1994 and that the Bay Plan merged with the Plan effective December 31, 1994. The modification shall consist of the creation of levels within this schedule of benefits which levels will be based upon the benefits provided on a termination basis from each of the Plans other than the lowest funded Plan. The schedule or schedules of benefits within the schedule of benefits created above by this Section 13.1(c)(4), shall be formulated upon the same standards as are set forth in this Section 13.1(c)(4) for creation of the first schedule of benefits. However, if the liabilities transferred from the Bay Plan or the Omni Plan are less than 3% of the assets of this Plan as of at least 1 day in this Plan's Plan Year ending December 31, 1994, a special schedule of benefits shall be created for the applicable Plan (consisting of all of the benefits that would be provided by the applicable Plan on a termination basis just prior to the merger), which schedule shall be payable in a priority category higher than the highest priority category in Section 4044 of ERISA. Assets will be allocated to that special schedule in accordance with the allocation of assets to scheduled benefits in this paragraph (4). (5) The assets shall then be allocated to those benefits in the priority category described in paragraph (3) with respect to which assets were not allocated. This allocation is made to the extent that these benefits are not associated with benefits in the schedule. (6) Finally, the assets shall be allocated in accordance with Section 4044 with respect to priority -99- 104 categories lower than the priority category described in paragraph (5). This allocation is made to the extent that these benefits are not associated with benefits in the schedule. (7) For purposes of this Section 13.1(c): (A) The term "benefits on a termination basis" means the benefits that would be provided exclusively by plan assets pursuant to Section 4044 of ERISA and the regulations thereunder if the relevant plan terminated, on the basis of reasonable actuarial assumptions acceptable to the Pension Benefit Guaranty Corporation. (B) The term "lowest funded plan" means the plan which, immediately prior to the merger, would have its assets exhausted in a higher priority category than the other plans. Where all plans immediately prior to the mergers would have their assets exhausted in the same priority category of Section 4044 of ERISA in the event of termination, the lowest funded plan is the one in which the assets would satisfy the lowest proportion of the liability allocated to that priority category. (C) The term "priority category" means the category of benefits described in each paragraph of Section 4044(a) of ERISA. References to higher or highest priority categories refer to those priority categories which receive the first allocation of assets. (d) If after all liabilities of the Plan to Employees, pensioners and their Beneficiaries have been satisfied, as hereinabove required, there are residual assets of the Plan, such assets shall be allocated as determined by the Pension Committee among those Participants in the Plan who are employed by the Association on the Cessation Date (other than those Participants who are not actively employed by the Association on that date due to a total and permanent disability as defined in Section 4.4(c) hereof), such allocation to be in the ratio that the Present Value of such Participant's Accrued Benefit (as hereinafter defined), bears to the aggregate Present Value of such Accrued Benefits of all such Participants. For purposes hereof: -100- 105 (1) The Present Value of a Participant's Accrued Benefit shall be determined as of the Termination Date on the same basis as the lump sum value of a Participant's Accrued Benefit is determined under Section 13.1(e) hereof except that the Accrued Benefit shall be determined based on a Participant's Final Average Monthly Earnings not in excess of 1/12 of $150,000 and without regard to the provisions of Section 4.2(ii), and without regard to this Section 13.1(d). (2) The benefit of any Participant shall not be increased under this Section 13.1(d) to the extent such increase would result in a failure to meet any requirement of Section 401(a)(4) or Section 415 of the Code. If any benefit is reduced by reason of Section 401(a)(4) or Section 415 of the Code, the amount of said reduction shall be allocated to the remaining Participants otherwise entitled to an allocation of the residual assets on the same basis as set forth above. (3) Any amount an Employee may be eligible to receive as a return of Accumulated Contributions under Section 4.6 or 5.1 shall be disregarded. (4) In determining the Accrued Benefit of any Participant, any amount transferred to this Plan from another Plan (including "Rollover Accounts"), and additions to a Participant's Accrued Benefit by reason of his service with an employer other than the Association and any Credited Service granted to any Participant under Articles XIV through XVIII based on the Participant's service prior to becoming a Participant in this Plan shall not be taken into account. In implementing the foregoing allocation of residual assets, the proposed allocation shall be submitted to the Internal Revenue Service for a favorable determination letter and the Pension Committee shall have discretion to alter or amend the method of allocation to meet the nondiscrimination and other requirements of the Internal Revenue Service for the favorable letter. (e) The allocation referred to in this Section 13.1, shall be implemented through the purchase by the Trustee or Insurance Company of insurance company annuity contracts providing -101- 106 for payment of benefits in the form and manner otherwise provided for under this Plan or, to the extent provided in the following paragraph, by distribution of the lump sum Actuarial Equivalent value of the Participant's Accrued Benefit and any other amounts to which he may be entitled under this Plan. For purposes hereof,the Actuarial Equivalent lump sum value of any annuity shall be determined based on the following: (1) the table prescribed by the Secretary of Treasury pursuant to Section 415(b)(2)(E)(v) of the Code (the "Applicable Mortality Table"); and (2) the annual rate of interest on 30-year Treasury securities for November of the Plan Year preceding the date of the distribution (the "Applicable Interest Rate"); provided, however, that in no event shall the lump sum Actuarial Equivalent value for an Omni Plan Participant, if any, be less than required under the Omni Plan. If the allocations produce a pension which has a lump sum Actuarial Equivalent value that is $3,500 or less, the benefit (including any allocation of residual assets) of any person whose benefit is not in pay status shall be paid in a lump sum. If the allocations produce a pension for a person which has a lump sum Actuarial Equivalent value that is more than $3,500, any person whose benefit is not in pay status other than a person who was provided an option to elect a lump sum payment under Section 11.6, shall be provided a written notice and opportunity to elect, with the consent of his Spouse (if any) (other than the Spouse of an Alternate Payee) by a Qualified Election (consistent with Section 4.5(e)(1)), that the entire present value of his benefits (including any allocation of residual assets) shall be distributed to him in the form of a lump sum. -102- 107 If any such person does not elect a lump sum, the entire value of his Accrued Benefit and any allocation of residual assets shall be paid in the form and manner otherwise provided by the Plan. The allocation shall be in accordance with the Act and Code and regulations existing at the time of termination, or partial termination and upon such allocation all affected Participants, Spouses, Alternate Payees and Beneficiaries hereunder shall be fully vested in the amounts herein allocated; provided, however, that the formula provided by this Section 13.1 shall be deemed amended automatically and without further action of the Association, or the Committee, to comply with said Act and Code, and no Participant, Spouse, Alternate Payee or Beneficiary shall have any right against the Association, Committee, trustee, or insurance company for deviation from the allocation referred to above if the allocation complies with the Act and Code at the time of termination or partial termination. SECTION 13.2 PROVISIONS FOR HIGHLY COMPENSATED EMPLOYEES. In order to prevent any discrimination in favor of Highly Compensated Employees in the event of termination of the Plan, the allocation of contributions is subject to the following limitations: (a) Notwithstanding any provision of the Plan to the contrary prior to January 1, 1991, the maximum amount of contributions by the Association which may be used to provide benefits for Employees whose anticipated annual retirement benefits exceed $1,500.00 and who are among the 25 highest paid Employees of the Association as of the Effective Date (including persons who do not become Employees at such time but who may later become Employees) shall, in the event that this Plan is terminated within 10 years after the Effective Date, or in the event that the -103- 108 benefits provided for such an Employee become payable within 10 years of the Effective Date, be limited to the largest of: (1) $20,000.00; (2) an amount equal to 20% of the first $50,000.00 of such Employee's annual compensation, multiplied by the number of years between the Effective Date and (A) the date of termination of the Plan, (B) the date benefits become payable if such date precedes termination of the Plan, or (C) the date of the failure to meet the current costs of the Plan, as appropriate; or (3) for a "substantial owner" as defined in Section 4022(b)(5) of ERISA, a dollar amount which equals the present value of the benefit guaranteed for such Employee under said Section 4022, or if the Plan has not terminated, the present value of the benefit that would be guaranteed if the Plan terminated on the date the benefit commences, determined in accordance with the regulations of the Pension Benefit Guaranty Corporation; or (4) for an Employee who is not a substantial owner, a dollar amount which equals the present value of the maximum benefit described in Section 4022(b)(3)(B) of ERISA (determined on the earlier of the date the Plan terminates or on the date benefits commence, and determined in accordance with regulations of the PBGC), without regard to any other limitations in Section 4022 of ERISA. However, if the full current costs of the Plan have not been met on the date described in (A) or (B) of paragraph (2) hereof, whichever is applicable, then the date of the failure to meet such full current costs shall be substituted for the date referred to in (A) or (B) of paragraph (2). For purposes of determining the contributions which may be used for the benefit of an Employee when (B) of paragraph (2) applies, the number of years taken into account may be recomputed for each year if the full current costs of the Plan are met for such year. -104- 109 For purposes hereof, the Association contributions which, at a given time, may be used for the benefits of an Employee include any unallocated funds which would be used for his benefits if the Plan were then terminated or the Employee were then to withdraw from the Plan, as well as all contributions allocated up to that time exclusively for his benefits. The provisions hereof apply to a former or retired Employee of the Association, as well as to an Employee still in the Association's service. The following terms are defined for purposes hereof: (1) The term "benefits" includes any periodic income, any withdrawal values payable to a living Employee, and the cost of any death benefits which may be payable after retirement on behalf of an Employee, but does not include the cost of any death benefits with respect to an Employee before retirement nor the amount of any death benefits actually payable after the death of an Employee whether such death occurs before or after retirement. (2) The term "full current costs" means the normal cost, as defined in Regulation Section 1.404(a)-6, for all years since the Effective Date of the Plan, plus interest on any unfunded liability during such period. (3) The term "annual compensation" of an Employee means either such Employee's average regular annual compensation, or such average compensation over the last 5 years, or such Employee's last annual compensation if such compensation is reasonably similar to his average regular compensation for the 5 preceding years. If the Plan is amended subsequent to the Effective Date to increase substantially the extent of possible discrimination, then in the event of the subsequent termination -105- 110 of the Plan, the provisions of this section shall be applied to the Plan as so amended, as if the Effective Date defined above were the date of such subsequent amendment. (b) Notwithstanding any provisions of the Plan to the contrary, on and after January 1, 1990: (1) In the event of the termination of this Plan, the benefit of any Highly Compensated Employee (and any Highly Compensated Former Employee) is limited to a benefit that is nondiscriminatory under Code Section 401(a)(4). (2) The annual payments to a Restricted Employee shall be restricted to an amount equal to the payments that would be made on behalf of a Restricted Employee under a Single Life Annuity that is the Actuarial Equivalent of the sum of the Restricted Employee's Accrual Benefit and the Restricted Employee's other benefits under the Plan. The restrictions in this subsection (b)(2) do not apply, however, if: (A) After payment to a Restricted Employee of all benefits described in subsection (b)(4), the value of Plan assets equals or exceeds 110% of the value of current liabilities, as defined in Section 412(l)(7), or (B) The value of the benefits described in subsection (b)(4) for a Restricted Employee is less than 1% of the value of current liabilities. (3) For purposes hereof, a "Restricted Employee" is any Highly Compensated Employee, as defined in Code Section 414(q) and any Highly Compensated Former Employee, as defined in Code Section 414(q)(9). In any 1 Plan Year, however, the total number of Restricted Employees is limited to the 25 Highly Compensated Employees and Highly Compensated Former Employees with the greatest Compensation. (4) For purposes of this subsection (b)(4) of this Section 13.2, "benefit" includes loans in excess of the amounts set forth in Code Section 72(p)(2)(A), any periodic income, any withdrawal values payable to a living Employee, and any death benefits not provided for by insurance on the Employee's life. -106- 111 SECTION 13.3 TERMINATION WITH RESPECT TO ONE EMPLOYER. If 1 Employer of the Association, as defined in Section 1.6, ceases to be a party to this Plan, the funds then in the hands of the Trustee which are allocable to such Employer, as determined by the actuary, shall be apportioned to the Covered Employees of such Employer in accordance with the provisions of this Article XIII. In all other respects, this Plan with the remaining Employers shall continue in full force and effect. Notwithstanding the above, a Covered Employee of the terminating Employer who transfers his employment within 30 days to the remaining active Employers hereunder, shall remain an active Covered Employee under the Plan and he will receive no allocation in accordance with the above, and his service with such terminating Employer shall be recognized in the determination of his eligibility and amount of his retirement income payable under the Plan. ARTICLE XIV ----------- EMPLOYEES TRANSFERRED FROM FIRST FEDERAL SAVINGS AND ---------------------------------------------------- LOAN ASSOCIATION OF OWOSSO EMPLOYEES' PENSION TRUST ---------------------------------------------------- SECTION 14.1 ELIGIBILITY OF EMPLOYEES. Anything to the contrary herein notwithstanding, an Employee whose employment was transferred from First Federal Savings and Loan Association of Owosso (hereinafter "Owosso") to the Association as a result of the merger effective May 1, 1976, shall automatically become a Covered Employee on the later of January 1, 1977, or the January 1 of the Plan Year that he completes the requirements of Section -107- 112 2.2(a) or (b), of the Plan. Solely for purposes of determining the "Monthly Earnings" and "Final Average Monthly Earnings" of such Employees under Section 1.26 and 1.19 hereof, employment with Owosso shall be deemed employment with the Association. SECTION 14.2 PROCEDURE FOR EFFECTUATING ROLLOVERS. An Employee eligible to participate in the Plan, regardless of whether he has satisfied the requirements of Article II of the Plan, who, as a result of termination of the First Federal Savings and Loan Association of Owosso Employees' Pension Trust (the "Owosso Trust"), is entitled to receive a distribution of his entire interest in such Trust, may, by election made prior to such distribution in accordance with procedures approved by the Committee, cause his entire distribution to be transferred directly from the Trustee of the Owosso Trust to the Trustee managing and operating the Fund hereunder. Such distribution shall thereafter be held by the Trustee hereunder pursuant to the terms of this Plan and of the trust agreement executed between the Trustee of the Fund and the Association. SECTION 14.3 CREDITING OF AMOUNT TRANSFERRED. Upon transfer of an amount from the Owosso Trust to this Plan and the Fund on behalf of an Employee, the amount transferred shall be credited to a separate Rollover Account to be maintained for the Employee, which Account shall be fully vested in the Employee. In the event of such a transfer by an Employee who is otherwise eligible to participate in the Plan but who has not yet completed the age and service requirements of Article II hereof, his -108- 113 Rollover Account shall represent his sole interest in the Plan until he becomes a Covered Employee. SECTION 14.4 CREDIT FOR SERVICE. Anything to the contrary herein notwithstanding, any Employee whose employment was transferred to the Association from Owosso as a result of the merger effective May 1, 1976, shall only receive credit for his Years of Service and Credited Service prior to January 1, 1977 for all purposes of this Plan, as follows: (a) An Employee entitled to receive a distribution from the Owosso Trust upon its termination: (1) Shall receive no Credited Service under this Plan for his service prior to January 1, 1977 with the Association or with Owosso if he elects not to transfer the entire amount of his distributable interest in the Owosso Trust to this Plan and the Fund in the manner set forth in Section 14.2. (2) Shall receive 1 year of Credited Service (computed to the nearest 1/12) for all purposes of this Plan for each "Year of Service" (as determined under the Owosso Trust) of such Employee with the Association or Owosso prior to January 1, 1977, if he elects to transfer the entire amount of his distributable interest in the Owosso Trust to this Plan and the Fund in the manner set forth in Section 14.2. (3) Shall receive 1 Year of Service under this Plan for each "Year of Service" (as determined under the Owosso Trust) of such Employee with the Association or Owosso prior to January 1, 1977. (b) An Employee not entitled to receive a distribution from the Owosso Trust upon its termination shall receive 1 Year of Service and 1 year of Credited Service for each year or portion thereof of his employment with the Association or -109- 114 Owosso from his last date of employment to January 1, 1977, as determined under the provisions of Article VI of this Plan. For service after December 31, 1976, an Employee shall be credited with Years of Service and Credited Service under the provisions of Article VI of this Plan and for all purposes thereof such Employee's "Computation Years" shall be deemed to commence January 1. SECTION 14.5 RETIREMENT AND DEATH BENEFITS. Anything to the contrary herein notwithstanding, an Employee having a Rollover Account in this Plan shall, in addition to the benefits otherwise provided by this Plan, be entitled to the following: (a) DEATH PRIOR TO BECOMING ENTITLED TO NORMAL OR EARLY RETIREMENT BENEFIT OR DEATH BENEFIT. If such Employee dies prior to becoming entitled to any Normal or Early Retirement Benefit or Death Benefit under the Plan, including the survivor annuities to be paid to such Employee's Spouse pursuant to the terms of Section 5.2, his Spouse, beneficiaries or his estate shall be paid the amount of his Rollover Account in a lump sum as provided in Section 11.5, hereof (less any deduction required by Section 14.5(g), hereof); provided, however, that after December 31, 1984, unless the Employee and his Spouse, if any, elect, pursuant to a Qualified Election under Section 4.5, to receive a lump sum cash payment, the Actuarial Equivalent of his Rollover Account shall be paid to such Employee and his Spouse, if any, in the Normal Form, commencing at such Employee's Normal -110- 115 Retirement Age. No other benefits shall be paid to such Employee, his Spouse or his beneficiaries under this Plan. (b) DEATH OF EMPLOYEE HAVING A SURVIVING SPOUSE PRIOR TO COMMENCEMENT OF BENEFITS BUT AFTER OBTAINING A NONFORFEITABLE INTEREST. If such Employee has a surviving Spouse by legal marriage which has been in effect for one or more years, he shall be entitled to make a Qualified Election (as defined in Section 4.5) that upon his death prior to commencement of his benefits under Article IV or Article V of this Plan, the amount of his Rollover Account shall be paid to his designated beneficiary or to his estate as provided in Section 11.5, in lieu of the Death Benefit to be paid to such Employee's Spouse pursuant to the terms of Section 5.2. Any such election by such Employee shall be made not less than 60 days prior to the later of the date such Employee attains a nonforfeitable interest in the Plan (or July 1, 1985, if such Employee had not attained age 55 with 10 Years of Service on January 1, 1984), in accordance with procedures approved by the Committee, and, thereafter, such election or failure to elect shall be irrevocable. If such Employee does not timely elect to receive his Rollover Account as above provided and such Employee dies prior to commencement of his retirement benefit payments, his Spouse, if then living, shall be entitled to receive the Death Benefit to be paid to such Employee's Spouse pursuant to the terms of Section 5.2, and no other benefits (including the Rollover Account) shall be paid to such Employee, his Spouse, or his beneficiaries under this Plan. -111- 116 (c) NORMAL OR EARLY RETIREMENT. If such Employee shall retire under the Normal or Early Retirement provisions of the Plan and if on the date of such retirement the actuarial value of the benefits to be paid to such Employee (and his beneficiaries and estate) shall be less than the amount of such Employee's Rollover Account, then the benefits which such Employee (and his beneficiaries and estate) otherwise would be entitled to receive under Article IV of this Plan shall be actuarially increased in order to be equivalent to the amount of his Rollover Account. Such benefits shall be paid in the same form and manner as provided for payment of such Employee's benefits under Article IV. No other benefits shall be paid to such Employee or his beneficiaries under this Plan. (d) TERMINATION OF EMPLOYMENT. If such Employee shall have a Break in Service prior to obtaining a nonforfeitable interest in the Plan, his Rollover Account shall be distributed to him forthwith and no other benefit shall be paid to such Employee or his beneficiaries under this Plan; provided, however, that after December 31, 1984, unless the Employee and his Spouse, if any, elect, pursuant to a Qualified Election under Section 4.5, to receive a lump sum cash payment, the Actuarial Equivalent of his Rollover Account shall be paid to such Employee and his Spouse, if any, in the Normal Form commencing at such Employee's Normal Retirement Age. If such Employee shall have a Break in Service with a nonforfeitable interest in the Plan prior to January 1, 1985, the Employee shall elect in writing within 30 days of such termination, either: -112- 117 (1) To receive distribution of his Rollover Account immediately and have any benefits to which he may be entitled pursuant to Section 5.1(b), actuarially reduced as of the date of distribution of the Rollover Account by the amount of his Rollover Account; or (2) To receive the benefits provided under Section 5.1(b), in lieu of his Rollover Account, such benefits to be actuarially increased (if less than the amount of his Rollover Account) in order to be equivalent to the amount of his Rollover Account. After December 31, 1984, if an Employee with a nonforfeitable interest in the Plan shall have a Break in Service, he will receive the benefits provided under Section 5.1(b), in lieu of his Rollover Account, such benefits to be actuarially increased (if less than the amount of his Rollover Account) in order to be equivalent to the amount of his Rollover Account, unless the Employee and his Spouse, if any, elect pursuant to a Qualified Election under Section 4.5, to receive distribution of his Rollover Account immediately and to have any benefits to which he may be entitled pursuant to Section 5.1(b), actuarially reduced as of the date of distribution of the Rollover Account by the amount of his Rollover Account. The actuarially reduced or increased benefits to be provided under Section 5.1(b), shall be paid in the same form and manner as provided under that subsection and no other benefits shall be paid to such Employee or his beneficiaries under this Plan. If such Employee receives a distribution of his Rollover Account after a Break in Service and subsequently is reemployed, his previous Years of Service shall be reinstated. Credited Service prior to January 1, 1977, shall be reinstated -113- 118 only if the Employee repays, within 2 years following his date of reemployment, the amount of the Rollover Account with interest at the rate of 5% per annum. (e) DEATH OF EMPLOYEE AFTER RETIREMENT. When a Covered or Vested Employee dies after retirement, no benefits shall be payable under the Plan unless his beneficiary is entitled to a benefit under the Qualified Joint and Survivor Annuity or 100% Joint Annuitant Option provisions described in Section 4.5. (f) DEATH OF AN EMPLOYEE ON OR AFTER HIS NORMAL RETIREMENT DATE, AND PRIOR TO HIS DEFERRED RETIREMENT DATE. In the event of the death of an active Covered Employee on or after his Normal Retirement Date, and prior to his Deferred Retirement Date, no benefits shall be payable under the Plan unless the Employee's surviving Spouse is entitled to benefits in accordance with Section 5.2. If such an option is in effect, the Covered Employee shall be assumed to have retired on the date of his death for purposes of Section 14.5(c), hereof. (g) TOTAL AND PERMANENT DISABILITY RETIREMENT. In the event of Total and Permanent Disability Retirement of such Employee, he shall receive during such retirement the Disability Retirement Benefit, if any, provided by Section 4.4, hereof. Anything in this Article XIV to the contrary notwithstanding, any Disability Retirement Benefit paid to such Employee shall reduce the balance in his Rollover Account for purposes of computing the right of such Employee and his beneficiaries or estate to any other benefits under this Plan. -114- 119 SECTION 14.6 TERMINATION OF PLAN. In the event of termination of the Plan and distribution of the assets of the Fund in accordance with Section 13.1 hereof, to the extent permitted under the Employee Retirement Income Security Act of 1974: (a) The Rollover Account of an Employee shall be considered an Employee contribution to the Plan and shall be given the same precedence as a "Covered Employee's Accumulated Contributions" under Section 13.1(a)(1); provided, however, that the Actuarial Equivalent of any retirement benefits which the Employee has received shall be subtracted from the value of the Rollover Account. (b) In determining the balance, if any, of the benefits which the Employee is entitled to receive under Section 13.1(a)(2) through 13.1(a)(5) of the Plan, the amount set forth in (a) above shall be subtracted. ARTICLE XV ---------- EMPLOYEES TRANSFERRED FROM KALAMAZOO ------------------------------------ SAVINGS AND LOAN ASSOCIATION PENSION PLAN ----------------------------------------- SECTION 15.1 MERGER WITH KALAMAZOO SAVINGS AND LOAN ASSOCIATION PENSION PLAN. Effective October 1, 1981, the Kalamazoo Savings and Loan Association Pension Plan (having an effective date of October 1, 1961 and a restated date of October 1, 1976), as in effect on September 30, 1981 (hereinafter the "Kalamazoo Plan"), and all of its assets and liabilities are hereby merged into this Plan, and this Plan shall be the surviving Plan. The existence of the Kalamazoo Plan shall cease as of the -115- 120 merger, except to the extent that its provisions are incorporated herein by reference and made applicable by this Plan. SECTION 15.2 ASSETS OF THE KALAMAZOO PLAN. On September 30, 1981, all of the assets of the Kalamazoo Plan were held by the Minnesota Mutual Life Insurance Company of St. Paul, Minnesota (hereinafter "Minnesota Mutual"), pursuant to a Group Annuity Contract No. 8845-DA (hereinafter the "Group Annuity Contract") with Kalamazoo Savings and Loan Association as Contract Holder (hereinafter "Kalamazoo"), having an effective date of October 1, 1976. Upon the merger of Kalamazoo and the Association effective May 1, 1981, the Association was automatically substituted for Kalamazoo as Contract Holder. Anything in this Plan to the contrary notwithstanding, on and after October 1, 1981 all of the assets of the Kalamazoo Plan held by Minnesota Mutual pursuant to the Group Annuity Contract shall be deemed held for the purposes of this Plan. As soon as practical, the Association shall take all steps necessary to have Minnesota Mutual transfer the Group Annuity Contract to cover this merged Plan, in lieu of the Kalamazoo Plan. After September 30, 1981, the assets of the Kalamazoo Plan held in the Group Annuity Contract shall not be required to be segregated from the assets of this Plan and may be commingled with the other assets of this Plan. From time to time the Association may exercise any option available to it as Contract Holder under the Group Annuity Contract, including the option to liquidate the Group Annuity Contract. If the Association elects to liquidate the Group Annuity Contract, then the assets from such Group Annuity Contract shall be transferred -116- 121 by Minnesota Mutual to the Trustee under this Plan and may be commingled with the other assets of this Plan as determined by the Committee. SECTION 15.3 ELIGIBILITY OF EMPLOYEES. Anything to the contrary herein notwithstanding, an Employee who was an active Participant in the Kalamazoo Plan on September 30, 1981 and whose employment was transferred from Kalamazoo to the Association as a result of the merger effective May 1, 1981, shall automatically become a Covered Employee on October 1, 1981. Any such Employee who was not a Participant in the Kalamazoo Plan as of September 30, 1981 shall become a Covered Employee on January 1 of the Plan Year that he completes the requirements of Section 2.2(a) or (b), of this Plan. For purposes of determining the eligibility of an Employee under Section 2.2(a) or (b) hereof, employment with Kalamazoo shall be deemed employment with the Association. SECTION 15.4 CREDIT FOR SERVICE. Anything to the contrary herein notwithstanding, any Employee whose employment was transferred to the Association from Kalamazoo as a result of the merger effective May 1, 1981, shall only receive credit for his Years of Service and Credited Service prior to October 1, 1981, for all purposes of this Plan, as follows: (a) An Employee who was a Participant in the Kalamazoo Plan on September 30, 1981: (1) Shall receive 1 Year of Service under this Plan (computed to the nearest 1/12) for each "Year of Service" (as determined under the Kalamazoo Plan) of -117- 122 such Employee with Kalamazoo or the Association prior to October 1, 1981. (2) Shall receive 1 year of Credited Service (computed to the nearest 1/12) for all purposes of this Plan for each "Year of Service" (as determined under the Kalamazoo Plan) of such Employee with Kalamazoo or the Association prior to October 1, 1981. (b) An Employee who was not a Participant in the Kalamazoo Plan on September 30, 1981, shall receive 1 Year of Service and 1 year of Credited Service for each year or portion thereof of his employment with Kalamazoo or the Association from his last date of employment with Kalamazoo to October 1, 1981, as determined under the provisions of Article VI of this Plan, but for purposes of applying said Article VI, employment with Kalamazoo shall be deemed employment with the Association. For service after September 30, 1981, an Employee transferred from employment with Kalamazoo shall be credited with Years of Service and Credited Service under the provisions of Article VI of this Plan and for all purposes thereof if such Employee was a Participant in the Kalamazoo Plan on September 30, 1981, such Employee's first "Computation Year" shall be deemed to commence October 1, 1981. SECTION 15.5 RETIREMENT AND DEATH BENEFITS. Anything to the contrary herein notwithstanding, a Covered Employee who was a Participant in the Kalamazoo Plan on September 30, 1981, shall be entitled to the benefits generally provided by this Plan and, in addition, shall be entitled to the following: -118- 123 (a) NORMAL OR EARLY RETIREMENT OR TERMINATION OF EMPLOYMENT WITH A NONFORFEITABLE INTEREST. If such Covered Employee shall retire under the Normal or Early Retirement provisions of the Plan, or if such Covered Employee should terminate his employment with a nonforfeitable interest in Association contributions under Section 5.1(b), or Section 8.1 of the Plan (without regard to the modifications provided by Section 15.5(b) of this Plan), then for purposes of calculating such Covered Employee's Normal Retirement Benefit or Early Retirement Benefit, or for determining his termination of employment benefit under Section 5.1(b), such Covered Employee's accrued monthly Normal Retirement Benefit under this Plan shall be increased by the excess of the vested portion of the Covered Employee's Retirement Annuity under the Kalamazoo Plan, as hereinafter defined (the "Kalamazoo Retirement Annuity"), if any, over the monthly accrued Normal Retirement Benefit payable to the Covered Employee under the first paragraph of Section 4.2 or under Section 4.3, or under Section 5.1(b), or under Section 8.2, of this Plan, as applicable. For all purposes of this Plan, the "Kalamazoo Retirement Annuity" of a Covered Employee shall mean the product of: (1) 108%, multiplied by (2) The Covered Employee's "Accrued Benefit," calculated as provided under Section 2.24 of the Kalamazoo Plan at the time of the Employee's Normal or Early Retirement or such other termination of employment, except that in calculating such benefit: (A) The Effective Compensation of such Covered Employee shall be the Employee's Effective Compensation under the Kalamazoo Plan, assuming no -119- 124 change in his Annual Compensation after April 30, 1981, and (B) In lieu of his "Years of Service" after October 1, 1981, there shall be substituted his years of Credited Service after October 1, 1981, as determined under this Plan. and the vested portion of the Kalamazoo Retirement Annuity shall be determined under Section 15.5(b)(2) below. Benefits payable to a Covered Employee hereunder, shall be paid in the same form and manner and with the same actuarial reductions for early payment and for payment other than in the form of a Single Life Annuity as are provided for payment of such Employee's Normal Retirement, Early Retirement or termination of employment benefits under Articles IV and V and shall be subject to the limitations imposed by Section 4.2(a), of the Plan. (b) TERMINATION OF EMPLOYMENT WITHOUT A NONFORFEITABLE INTEREST. If a Covered Employee who is not then eligible for Normal or Disability Retirement Benefits under this Plan, shall have a Break in Service without a nonforfeitable interest in Association contributions on or after October 1, 1981, he shall be entitled to receive a monthly retirement benefit commencing on the first day of the month subsequent to his 65th birthday, determined by multiplying: (1) The Covered Employee's Kalamazoo Retirement Annuity; by (2) The vested percentage of the Covered Employee based upon the number of the Covered Employee's Years of Service at his Break in Service determined according to the following schedule (unless the Plan is a Top Heavy Plan, in which event the vested percentage -120- 125 under Section 8.1, shall be applicable to the extent therein provided): Completed Years of Service Percentage Vested ---------------- ----------------- Less than 4 0% 4 25% 5 30% 6 35% 7 40% 8 45% 9 50% 10 100% provided, however, that if the Covered Employee has 1 or more Hours of Service after December 31, 1988, the vested percentage of a Covered Employee who has 5 or more Years of Service at his Break in Service shall be 100%. The benefit, if any, payable to such Employee hereunder shall be treated for all purposes of the Plan as payable in accordance with the terms of Section 5.1(b), as if such Employee were entitled to a benefit under subparagraph (A) of that Section 5.1(b), except that the Employee may not elect in lieu thereof, that the amount determined in this paragraph be payable at any time prior to the first day of the month subsequent to his 65th birthday. The benefit payable under this Section 15.5(b) shall be paid in the form of a Single Life Annuity, or in the form of a Qualified Joint and Survivor Annuity or a 100% Joint Annuitant Option as provided in Section 4.5 for retirement benefits, or as provided in Section 15.5(d). (c) DEATH BENEFIT. If a Covered Employee, who was also a Participant in the Kalamazoo Plan as constituted prior to October 1, 1976, should die prior to his attaining eligibility for a Death Benefit to be paid to his Spouse under Section 5.2, a -121- 126 minimum death benefit shall be payable equal to the reserve value of his annuity benefit as transferred from the Kalamazoo Plan to this Plan. The Participants and the amounts of reserve transferred are set forth in Schedule A attached. If such Participant has not met the requirements for a Death Benefit to be paid to his Spouse under Section 5.2 of this Plan and if after December 31, 1984 the value of such Death Benefit is $3,500 or less, or if the Participant has met such requirements but is not lawfully married on the date of death, such death benefit shall be payable in a single sum to his beneficiary pursuant to Section 11.6. If after December 31, 1984 such Participant is married and such Death Benefit is in excess of $3,500, it shall be paid to such Employee's Spouse in the form of a survivor annuity for her lifetime, commencing when such Participant otherwise would have attained Normal Retirement Age, unless the Participant's Spouse elects a single lump sum payment. If such Participant has met the requirements for a Death Benefit to be paid to his Spouse under Section 5.2 of this Plan and is lawfully married on the date of death, the Death Benefit under this Section 15.5(c) shall first be applied to provide a benefit to the Covered Employee's Spouse pursuant to Section 5.2 above, and upon the death of the Spouse of the Covered Employee, the beneficiary of such Spouse shall receive a lump sum payment equal to the excess of the amount of reserve over the aggregate of the retirement income payments made to the Covered Employee's Spouse pursuant to Section 5.2 above. -122- 127 (d) 10-YEAR CERTAIN OPTION. In lieu of the Single Life Annuity or Joint and Survivor Annuity or 100% Joint Annuitant Option as payable under this Plan, a Covered Employee who formerly participated in the Kalamazoo Plan may, at any time he is eligible to elect a Qualified Joint and Survivor Annuity hereunder, elect by a Qualified Election (as defined in Section 4.5 hereof), that in lieu thereof the 10-Year Certain Option apply to any monthly retirement benefit he is eligible to receive (other than a Disability Retirement Benefit), by providing written notice to the Committee. Such option shall be effective as of the date his retirement benefit commences. Such election shall be made to the Committee in writing prior to the Covered Employee's retirement date and the Covered Employee shall designate a beneficiary who shall be entitled to receive any benefit payable after the Covered Employee's death. Under the 10-Year Certain Option, the Covered Employee shall receive a reduced retirement benefit during his lifetime after his retirement equal to 92.6% of his benefit in the form of a Single Life Annuity with the provision that if he dies prior to receiving 120 monthly retirement benefit payments, the remainder of such 120 monthly payments shall be payable to his designated beneficiary. The Employee may change his beneficiary designation at any time upon written notice to the Committee. The election of the 10-Year Certain Option may be rescinded by the Covered Employee at any time prior to the effective date of commencement of his retirement benefits. -123- 128 (e) MODIFICATION OF 100% JOINT ANNUITANT OPTION. Anything in Section 4.5(c), of this Plan to the contrary notwithstanding, the 100% Joint Annuitant Option may be elected by a Covered Employee (other than an Employee who is applying for a Disability Retirement Benefit hereunder), who formerly participated in the Kalamazoo Plan at any time prior to the date of commencement of such Employee's Normal or Early Retirement Benefit or his termination of employment benefit under Section 5.1(b), or Section 15.5(b), in lieu of such Option only being available as of the date his Normal Retirement Benefit commences. SECTION 15.6 BENEFITS OF PARTICIPANTS WHO TERMINATED PRIOR TO OCTOBER 1, 1981. Any Participant in the Kalamazoo Plan who commenced receiving a benefit from that Plan on or before October 1, 1981, shall continue to have the amount and manner of payment of his pension benefits determined in accordance with the terms of such Plan as applicable to such Participant prior to October 1, 1981, and for that purpose, the Kalamazoo Plan is hereby incorporated by reference. The benefits, if any, payable to such Participant, as so determined, shall be paid, as determined by the Committee, from: (a) any "Annuity Payments" purchased for such Participants under Section 2.07 of the Group Annuity Contract referred to in Section 15.2 hereof; or (b) the general assets of the Group Annuity Contract; or (c) the Fund established pursuant to Article IX of this Plan. SECTION 15.7 SPECIAL PROVISIONS APPLICABLE TO MERGER. The merger contemplated by this Article and the resolutions of the -124- 129 Association approving same are contingent upon and subject to obtaining such approval of the Internal Revenue Service, the United States Department of Labor and the Pension Benefit Guaranty Corporation, a body corporate within the U.S. Department of Labor, established under the provisions of Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA"), as the Association may find necessary to establish the continuing qualification of this Plan under ERISA and the deductibility for income tax purposes of any and all payments made by the Association under this Plan as being tax-exempt under Sections 401, 404 and 501(a) or other applicable provisions of the Internal Revenue Code, as from time to time amended (the "Code"), or to establish that the transactions contemplated by this Plan and such resolutions would not adversely affect the prior qualified status of this Plan or the Kalamazoo Plan. Any modification or amendment of this Plan or of said resolutions may be made retroactively by the Association and the merger of the Kalamazoo Plan may be abandoned retroactively by the Association if necessary or appropriate to qualify or maintain the qualified status of such Plans as a Plan meeting the requirements of ERISA and of the Code or any other applicable provisions of federal laws, as now in effect or hereafter amended or adopted, and the regulations issued thereunder. SECTION 15.8 SUPPLEMENTARY ACTION. If at any time the Committee shall consider or be advised that any further action or thing is necessary or desirable in order to vest in this Plan the title to any property or rights of the Kalamazoo Plan, the -125- 130 Committee is hereby authorized and directed to make all proper assignments and assurances and to do all things necessary or proper to vest title to such property or rights in this Plan. ARTICLE XVI ----------- EMPLOYEES TRANSFERRED FROM -------------------------- KENTWOOD SAVINGS AND LOAN ASSOCIATION ------------------------------------- Anything to the contrary herein notwithstanding, any Employee whose employment was transferred to the Association from Kentwood Savings and Loan Association (hereinafter "Kentwood") as a result of the merger effective January 15, 1982, shall receive, for his Years of Service and Credited Service prior to January 15, 1982, for all purposes of this Plan, 1 Year of Service and 1 year of Credited Service for each year or portion thereof of his employment with Kentwood or the Association from his last date of employment with Kentwood to January 15, 1982, as determined under the provisions of Article VI of this Plan, but for purposes of applying said Article VI, employment with Kentwood shall be deemed employment with the Association. For service after January 15, 1982, an Employee transferred from employment with Kentwood as aforesaid shall be credited with Years of Service and Credited Service under the provisions of Article VI of this Plan. -126- 131 ARTICLE XVII ------------ MERGER WITH THE OMNI SAVINGS BANK, FSB -------------------------------------- EMPLOYEES' RETIREMENT PLAN -------------------------- 17.1 MERGER WITH OMNI SAVINGS BANK, FSB EMPLOYEES' RETIREMENT PLAN. Effective October 31, 1994, the Omni Savings Bank, FSB Employees' Retirement Plan, as in effect on October 31, 1994 (the "Omni Plan"), and all of its assets and liabilities, are hereby merged into this Plan and this Plan shall be the surviving plan. The existence of the Omni Plan shall cease as of the merger, except to the extent that its provisions are incorporated by reference and made applicable by the Plan. Anything to the contrary herein notwithstanding, a Participant as defined in the Omni Plan shall only be entitled to receive a benefit under this Plan in an amount equal to his accrued benefit under the Omni Plan, such benefit to be payable solely in the form and manner provided under the terms of the Omni Plan as in effect as of October 31, 1994. Any Participant in the Omni Plan who commenced receiving a benefit from that Plan on or before October 31, 1994, shall continue to be paid from this Plan in the same amount and manner as he was receiving payment of his benefit under the terms of the Omni Plan as in effect prior to October 31, 1994, and only for these purposes the Omni Plan is hereby incorporated by reference. No Participant in the Omni Plan shall accrue any benefit under this Plan (other than his Omni Plan benefit) unless he otherwise becomes a Covered Employee for purposes of this Plan. 17.2 SPECIAL PROVISIONS APPLICABLE TO MERGER. The merger contemplated by this Article and the resolutions approving -127- 132 the same are contingent upon and subject to obtaining such approval of the Internal Revenue Service, as necessary to establish the continuing qualification of this Plan under ERISA and the deductibility for income tax purposes of any and all payments made by the Association under this Plan as being tax exempt under Sections 401, 404 and 501(a) or other applicable provisions of the Internal Revenue Code, as from time to time amended (the "Code"), or to establish that the transactions contemplated by this Plan and such resolutions would not adversely affect the prior qualified status of this Plan or the Omni Plan. Any modification or amendment of this Plan or of said resolutions may be made retroactively and the merger of the Omni Plan into this Plan may be abandoned retroactively by the Association if necessary or appropriate to qualify or maintain the qualified status of either plan as a plan meeting the requirements of ERISA and of the Code or any other applicable provisions of federal laws, as now in effect or hereafter amended or adopted, and the regulations issued thereunder. 17.3 SUPPLEMENTARY ACTION. If at any time the Committee shall consider or be advised that any further action or thing is necessary or desirable in order to vest in this Plan the title to any property or rights of the Omni Plan, the Committee is hereby authorized and directed to make all proper assignments and assurances and to do all things necessary or proper to vest title to such property or rights in this Plan. -128- 133 ARTICLE XVIII ------------- MERGER WITH BAY SAVINGS BANK, FSB --------------------------------- EMPLOYEES' RETIREMENT PLAN -------------------------- 18.1 MERGER WITH BAY SAVINGS BANK, FSB EMPLOYEES' RETIREMENT PLAN. Effective December 31, 1994, the Bay Savings Bank, FSB Employees' Retirement Plan as in effect on December 31, 1994 (the "Bay Plan"), and all of its assets and liabilities, are hereby merged into this Plan and this Plan shall be the surviving plan. The existence of the Bay Plan shall cease as of the merger, except to the extent that its provisions are incorporated by reference and made applicable by the Plan; provided, anything to the contrary herein notwithstanding, a Participant as defined in the Bay Plan shall only be entitled to receive a benefit under this Plan in an amount equal to his accrued benefit under the Bay Plan, such benefit to be payable in the form and manner provided under the terms of the Bay Plan as in effect as of December 31, 1994, except as provided in Sections 11.6 and 13.1 hereof. Except as provided in Section 13.1 hereof, any Participant in the Bay Plan who commenced receiving a benefit from that Plan on or before December 31, 1994, shall continue to be paid from this Plan in the same amount and manner as he was receiving payment of his benefit under the terms of the Bay Plan as in effect prior to December 31, 1994, and only for these purposes the Bay Plan is hereby incorporated by reference. No Participant in the Bay Plan shall accrue any benefit under this Plan (other than his Bay Plan benefit) unless he otherwise becomes a Covered Employee for purposes of this Plan. 18.2 SPECIAL PROVISIONS APPLICABLE TO MERGER. The merger contemplated by this Article and the resolutions approving -129- 134 the same are contingent upon and subject to obtaining such approval of the Internal Revenue Service, as necessary to establish the continuing qualification of this Plan under ERISA and the deductibility for income tax purposes of any and all payments made by the Association under this Plan as being tax exempt under Sections 401, 404 and 501(a) or other applicable provisions of the Internal Revenue Code, as from time to time amended (the "Code"), or to establish that the transactions contemplated by this Plan and such resolutions would not adversely affect the prior qualified status of this Plan or the Bay Plan. Any modification or amendment of this Plan or of said resolutions may be made retroactively and the merger of the Bay Plan into this Plan may be abandoned retroactively by the Association if necessary or appropriate to qualify or maintain the qualified status of either Plan as a plan meeting the requirements of ERISA and of the Code or any other applicable provisions of federal laws, as now in effect or hereafter amended or adopted, and the regulations issued thereunder. 18.3 SUPPLEMENTARY ACTION. If at any time the Committee shall consider or be advised that any further action or thing is necessary or desirable in order to vest in this Plan the title to any property or rights of the Bay Plan, the Committee is hereby authorized and directed to make all proper assignments and assurances and to do all things necessary or proper to vest title to such property or rights in this Plan. -130- 135 ARTICLE XIX ----------- GOVERNING LAW ------------- The Plan and all rights thereunder shall be governed, construed and administered in accordance with the laws of the State of Michigan and the Employee Retirement Income Security Act of 1974, as from time to time amended. IN WITNESS WHEREOF, this instrument has been executed at Detroit, Michigan, this ____ day of _______________, 1995. ATTEST: FIRST FEDERAL OF MICHIGAN /S/ W.S. Fambrough /S/ C. Gene Harling ______________________________ By:________________________________ C.Gene Harling Chairman of the Board, President and Chief Executive Officer -131- 136 SCHEDULE A ---------- AMOUNT OF RESERVE TRANSFERRED FROM KALAMAZOO PLAN
PARTICIPANT AMOUNT OF RESERVE - ----------- ----------------- Bowersox, Gladys L. $ 15,849 Brannock, Joyce I. 3,301 Brown, Leighton C. 36,875 Clark, Gladys J. 4,182 Filarski, Richard W. 28,379 Kling, Loretta B. 7,586 Moerman, Adrian 27,745 Nutt, Ada G. 7,171 Orosz, Janice E. 3,316 Osmer, Martha 3,070 Resh, Betty A. 1,534 Reynolds, Frederick C. 109,491 Smallwood, Dale 27,962 Stratton, Sharon Lee 2,796
-132- EX-10.18 6 EXHIBIT 10.18 1 EXHIBIT 10.18 FIRST FEDERAL OF MICHIGAN SALARIED EMPLOYEES' PROFIT SHARING PLAN (As Amended and Restated Effective January 1, 1995) 2 FIRST FEDERAL OF MICHIGAN SALARIED EMPLOYEES' PROFIT SHARING PLAN (As Amended and Restated Effective January 1, 1995) TABLE OF CONTENTS
ARTICLE SECTION PAGE - ------- ------- ---- I ESTABLISHMENT OF PLAN AND CREATION OF TRUST. 2 II DEFINITIONS................................. 3 III ADMINISTRATION.............................. 21 3.01 Allocation of Responsibility Among Fiduciaries for Trust Administration........ 21 3.02 Delegation of Responsibilities.............. 22 3.03 Miscellaneous............................... 22 3.04 The Committee............................... 23 IV ELIGIBILITY, PARTICIPATION, YEARS OF SERVICE AND BREAK IN SERVICE........................ 27 4.01 Eligibility................................. 27 4.02 Service Credited Under the Plan............. 29 4.03 Election to be a Trust Participant.......... 35 V CONTRIBUTIONS............................... 35 5.01 Amount...................................... 35 5.02 Computation................................. 37 5.03 Limitation on Contributions................. 37 VI ALLOCATION OF CONTRIBUTIONS................. 43 6.01 General..................................... 43 6.02 Full Cash Payment to Non-Trust Participants. 43 6.03 Partial Cash Payment to Trust Participants.. 44 6.04 Compliance with Statutory Limitations ...... 44 VII TRUST FUND.................................. 48 7.01 Allocation of Trust Fund Contributions...... 48 7.02 Ownership of Trust Fund..................... 49 7.03 Administration of Trust Fund................ 49 7.04 Investment.................................. 50 7.05 Election of Form of Investment.............. 50 7.06 Common Fund................................. 52 7.07 Revaluation................................. 52 7.08 Termination of Trust Fund................... 53 7.09 Collective Investments by Trustee........... 53 7.10 Investment in Woodward Funds................ 54
-i- 3 FIRST FEDERAL OF MICHIGAN SALARIED EMPLOYEES' PROFIT SHARING PLAN (As Amended and Restated Effective January 1, 1995) TABLE OF CONTENTS (CONTINUED)
ARTICLE SECTION PAGE - ------- ------- ---- VIII ACCOUNTS OF TRUST PARTICIPANTS.............. 55 8.01 Establishment of Account.................... 55 8.02 Allocation of Contribution.................. 55 8.03 Allocation of Improvements or Impairments... 55 8.04 Current Value of Participant's Account...... 56 8.05 Allocations in Event of Termination of Trust Fund.................................. 56 IX LISTS CERTIFIED TO COMMITTEE................ 57 9.01 General..................................... 57 9.02 Terminated Participants..................... 57 9.03 Additional Information...................... 58 X DISTRIBUTION OF BENEFITS FROM THE TRUST FUND 58 10.01 Withdrawals Due to Hardship................. 58 10.02 Distribution on Termination of Employment Other Than Due to Death..................... 61 10.03 Distribution upon Death..................... 63 10.04 Designation of Beneficiary.................. 66 10.05 Suspension.................................. 67 10.06 Limitations on Distributions................ 68 10.07 Qualified Domestic Relations Orders......... 71 10.08 Unclaimed Benefits.......................... 73 10.09 Eligible Rollover Distributions............. 74 XI TOP HEAVY PROVISIONS........................ 76 11.01 Minimum Contributions....................... 76 11.02 Impact Upon Maximum Contributions and Benefits.................................... 78 11.03 Top Heavy and Super Top Heavy Plan Defined.. 78 XII SPENDTHRIFT PROVISIONS...................... 83 XIII RIGHTS OF PARTICIPANTS AND THE ASSOCIATION.. 84 XIV THE TRUSTEE................................. 85 XV AMENDMENTS.................................. 91 XVI TERMINATION AND MERGER...................... 93 XVII MISCELLANEOUS............................... 96
-ii- 4 FIRST FEDERAL OF MICHIGAN SALARIED EMPLOYEES' PROFIT SHARING PLAN RESTATEMENT (As Amended and Restated Effective January 1, 1995) THIS AGREEMENT, made and entered into as of the ____ day of ______________, 1995, by and between FIRST FEDERAL OF MICHIGAN, a corporation organized under the Home Owners' Loan Act of 1933 of the United States of America, and having its principal office in the City of Detroit, Michigan, and the NBD Bank, a state banking association organized and existing under the laws of the State of Michigan and having its principal office in the City of Detroit, Michigan, as Trustee. W I T N E S S E T H: WHEREAS, effective January 1960, First Federal Savings and Loan Association of Detroit (First Federal of Michigan as of September 1, 1982), entered into an Agreement establishing the First Federal Savings and Loan Association of Detroit Employees' Profit Sharing Plan for the purpose of providing its eligible employees with additional incentive to continue efficient service, to reward eligible employees for loyal and faithful service, and to aid them in establishing financial security for themselves and for their families; and WHEREAS, effective September 1, 1982, the name of said Plan was changed to the "FIRST FEDERAL OF MICHIGAN SALARIED EMPLOYEES' PROFIT SHARING PLAN"; and 5 WHEREAS, the Agreement has been amended and restated on several occasions, the last such restatement being effective January 1, 1993; and WHEREAS, the Association, with the consent of the Trustee, now wishes to further amend the Plan, and in the interest of clarity to restate the Plan in its entirety. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto do hereby agree that the Plan is hereby amended in its entirety, effective January 1, 1995, and as amended is hereby restated as follows: ARTICLE I ESTABLISHMENT OF PLAN AND CREATION OF TRUST 1.01 First Federal of Michigan, previously known as First Federal Savings and Loan Association of Detroit, declared and established an employees' benefit program, effective as of January 1, 1960, which is to be known on and after September 1, 1982 as the "First Federal of Michigan Salaried Employees' Profit Sharing Plan" (hereinafter the "Plan"). First Federal of Michigan simultaneously with the execution of such Plan paid to the above-named Trustee the sum of $100.00 as its initial contribution to the Trust contemplated under said Plan and as a payment on account of said Association's contribution to said Trust under Article VII for the year ending December 31, 1960. Said contribution and all contributions hereafter made by First Federal -2- 6 of Michigan to said Trust for the year ending December 31, 1960, and for subsequent years, shall be held and administered by the above-named Trustee or its successors for the uses and purposes and subject to the terms and conditions set forth in this Agreement. ARTICLE II DEFINITIONS The following words and phrases shall have, for the purposes of this Agreement, the meaning ascribed to them below, except as the context shall otherwise require or clearly indicate: 2.01 "Act" means the Employee Retirement Income Security Act of 1974, as now in effect or hereafter amended. 2.02 "Actual Deferral Percentage" means for each Plan Year, the average of the ratios (calculated separately for each Participant in a specified group, and after December 31, 1988, calculated to the nearest 100th of 1% of the Participant's compensation) of: (a) the amount of contributions to be paid over to the Trust Fund on behalf of each such Participant for such Plan Year, to (b) the Participant's Compensation for such Plan Year, before taking into account the contribution allocated to his Account hereunder. -3- 7 2.03 "Adjustment Factor" means the cost of living factor prescribed by the Secretary of the Treasury under Section 401(a)(17), Section 402(g)(5), or Section 415(d), as applicable, of the Code for Plan Years beginning after December 31, 1987, as applied to such items and in such manner as the Secretary shall provide. 2.04 "Association" means First Federal of Michigan, its wholly owned subsidiary 1001 Services, Inc. If used in reference to an occurrence before September 1, 1982, "Association" means the "First Federal Savings and Loan Association of Detroit" and such subsidiary. Effective as of the date of adoption of this Plan and Trust by any Participating Company as set forth below, the term "Association" also means and includes any such Participating Company; provided, however, that whenever the Plan or Trust indicates that the "Association" may or shall take any action under the Plan or Trust, such action shall be taken by First Federal of Michigan for itself and as agent for any such Participating Company. The term "Participating Company" means any corporation which is classified by the Board of Directors of First Federal of Michigan as a Participating Company for purposes of this Plan and Trust, and which, with the approval of the Board of Directors of First Federal of Michigan, elects to become a party hereto by adopting the Plan and Trust for the benefit of its employees by resolution of its Board of Directors. As evidence of its adoption of the Plan and Trust, the Participating Company shall file certified copies of said resolution with First Federal of Michigan, and First Federal of Michigan shall file two copies -4- 8 thereof, together with 2 certified copies of its own Board of Directors resolution approving such participation, with the Trustee hereunder who shall acknowledge receipt thereon and return one copy to First Federal of Michigan. In all dealings with the Trustee, First Federal of Michigan shall act as agent for any Participating Company. Anything herein to the contrary notwithstanding, in the event of the merger of First Federal of Michigan into any other corporation, such corporation shall succeed to all of the rights and responsibilities of First Federal of Michigan hereunder. 2.05 "Beneficiary" means the person or persons designated by the Employee, in writing, or by the terms of this Plan, who is or may be entitled to a benefit hereunder in case of a Participant's death. 2.06 "Board of Directors" means the Board of Directors of the Association. 2.07 "Break in Service" means a "Break in Service" as defined in Section 4.02(b) hereof. 2.08 "Carry-Forward" for any Fiscal Year means: (a) for Fiscal Years ending prior to January 1, 1976, the amount by which 3% of Profit Sharing Earnings exceeds 15% of the aggregate Compensation of Participants for such Fiscal Year; (b) for Fiscal Years ending after December 31, 1975 and prior to January 1, 1989, the amount by which 3.5% of Profit Sharing Earnings exceeds 15% of the aggregate Compensation of Participants -5- 9 for such Fiscal Year; and (c) for Fiscal Years ending after December 31, 1988, the amount by which 4.5% of Profit Sharing Earnings exceeds 15% of the Aggregate Compensation of Participants for such Fiscal Year. 2.09 "Charter One" means Charter One Financial, Inc., a Delaware corporation. 2.10 "Code" means the Internal Revenue Code of 1986, as now in effect or hereafter amended. 2.11 "Committee" means the Committee constituted to administer the Plan as provided in Article III. 2.12 "Company Merger Effective Time" means the date on which the merger between FirstFed Michigan Corporation and Charter One Financial, Inc. shall become effective, as set forth in Section 1.2 of the Agreement and Plan of Merger by and between FirstFed Michigan Corporation and Charter One Financial, Inc. (the "Merger Agreement"). 2.13 "Compensation" means: (a) For any Fiscal Year, other than the Fiscal Year in which the Company Merger Effective Time occurs, for purposes of Sections 5.01 and 6.01, the regular basic remuneration paid to a Participant for services rendered to the Association from January 1 through November 30 of such Year (or, if the Employee first becomes a Participant on July 1 of that Year, from July 1 through November 30 of such Year), plus an extension to -6- 10 December 31 of such Year of the Employee's rate of regular basic remuneration in effect on November 30, excluding any bonuses, special compensation, pay for overtime or premium pay, and excluding the Association's cost for any public or private employee benefit plan, including this Plan, under rules uniformly applicable to all Employees similarly situated. For the Fiscal Year in which the Company Merger Effective Time occurs for purposes of Sections 5.01 and 6.01, the regular basic remuneration paid to a Participant for services rendered to the Association from January 1 through the Company Merger Effective Time (or, if the Employee first becomes a Participant on July 1 of that Year, from July 1 through the Company Merger Effective Time), excluding any bonuses, special compensation, pay for overtime or premium pay, and excluding the Association's cost for any public or private employee benefit plan, including this Plan, under rules uniformly applicable to all Employees similarly situated. (b) For all purposes of the Plan other than Section 5.01 and 6.01, all taxable amounts received by the Employee from the Association and Related and Predecessor Companies which are defined as compensation in Section 1.415-2(d) of the Regulations under the Code, including an Employee's earned income, wages, salaries, and fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Association (including commissions paid to salesmen, compensation for services on the -7- 11 basis of a percentage of profits, commissions on insurance premiums, tips and bonuses), during the Fiscal Year (or for the Fiscal Year in which the Company Merger Effective Time occurs, during the period from January 1 through the Company Merger Effective Time), and excluding the following: (1) For purposes of Section 5.03 only, Association contributions to a plan of deferred compensation which are not included in the Employee's gross income for the taxable year in which contributed or Association contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (2) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (3) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (4) Other amounts which received special tax benefits, or contributions made by the Association (whether or not under a salary reduction agreement) towards the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludible from the gross income of the Employee). Compensation for any Limitation Year is the Compensation actually paid or includible in gross income during such year; provided, however, that Compensation for the Limitation Year in which the Company Merger Effective Time occurs, shall be limited to that which is paid or includible in gross income during the period from January 1 through the Company Merger Effective Time. -8- 12 Except for purposes of Section 5.03, compensation shall include any amount which is contributed by the Association pursuant to a salary reduction agreement and which is not includible in the gross income of the employee under Section 125, 402(a)(8), 402(h) or 403(b) of the Code. (c) For any Fiscal Year prior to January 1, 1989 in which the Plan is a Top Heavy Plan and for each Fiscal Year subsequent to December 31, 1988, the annual Compensation of each Employee to be taken into account under the Plan shall not exceed $150,000 ($200,000 prior to January 1, 1994), as adjusted by the Adjustment Factor, except that any benefits which were accrued by a Participant during a period prior to January 1, 1989, when the Plan was not a Top Heavy Plan and which are based on Compensation in excess of $200,000, shall in no event be reduced. In determining the Compensation for an Employee after December 31, 1988 for purposes of this limitation the family aggregation rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term family shall include only the Spouse of the Employee and any lineal descendants of the Employee who have not attained the age 19 before the close of the year. If, as a result of the application of such rules, the adjusted $150,000 ($200,000 prior to January 1, 1994) limitation is exceeded, then the limitation shall be prorated among the affected individuals' Compensation determined under this Section 2.13(c) prior to the application of this limitation. -9- 13 2.14 "Computation Year" means a 12-consecutive month period commencing with an Employee's Employment Commencement Date (or, if applicable, his Reemployment Commencement Date), and each 12-month period thereafter. 2.15 "Effective Date of the Plan" means January 1, 1960. 2.16 "Employee" means any person employed by the Association who receives Compensation in the form of salary from the Association, but shall not include: (a) directors who are not officers or otherwise regular employees of the Association; (b) persons principally employed at the Bay Savings Division of First Federal; (c) persons covered by a collective bargaining agreement in which no specific provision is made for eligibility and participation under this Plan (participation in this Plan in such instance being a subject for collective bargaining like wages, hours, and other terms and conditions of employment); and (d) leased employees (within the meaning of Section 4.01(f)), unless such employees constitute more than 20% of the Association's non-highly compensated workforce within the meaning of Code Section 414(n)(5)(C)(ii). -10- 14 2.17 "Employment Commencement Date" means the date upon which an employee first performs an Hour of Service for the Association or a Related or Predecessor Company. 2.18 "Excess Deferral Contributions" means the excess of the aggregate contributions actually paid over to the Trust on behalf of a Participant and taken into account in determining the Actual Deferral Percentage of Highly Compensated Employees for any Plan Year over the maximum amount of such contributions permitted under Sections 2.02 and 6.04. The amount of Excess Deferral Contribution to be distributed with respect to a Participant for a Plan Year shall be reduced by any Excess Deferral Amount previously distributed for such Participant for the Plan Year. 2.19 "Family Member" means, with respect to any Employee, such Employee's spouse and lineal ascendants or descendants and the spouses of such lineal ascendants or descendants. 2.20 "Fiduciaries" means, for purposes of the "Act," the Association, the Committee and the Trustee, but only with respect to specific responsibilities of each for Plan administration, as described in Article III hereof. Each Fiduciary shall cease to be a fiduciary with respect to any fiduciary responsibility, if such responsibility is allocated to any other person pursuant to this Plan or if another person is designated to carry out such responsibility. -11- 15 2.21 "Fiscal Year" means the calendar year commencing January 1, 1960 and each succeeding calendar year, commencing January 1. The Fiscal Year shall be the "Plan Year" and "Limitation Year" for purposes of the Act. 2.22 "Highly Compensated Employee" means any highly compensated active employee and highly compensated former employee determined pursuant to Code Section 414(q) and pursuant to the calendar year calculation election provided in Regulation Section 1.414(q)-1T A-14(b). A highly compensated active employee includes any employee who performs service for the Association during the Plan Year and who during the Plan Year (a) receives compensation from the Association in excess of $75,000 (multiplied by the Adjustment Factor); (b) receives compensation from the Association in excess of $50,000 (multiplied by the Adjustment Factor) and is a member of the top paid group for such year (within the meaning of Regulation Section 1.414(q)-1T, A-9); (c) was an includible officer of the Association (within the meaning of Regulation Section 1.414(q)-1T, A-10) and receives Compensation during such Plan Year that is greater than 50% of the dollar limitation in effect under Section 415(b)(1)(A) of the Code; or (d) is a 5% owner of the Association (within the meaning of Regulation Section 1.414(q)-1T, A-8). If no officer has satisfied the compensation requirement of (c) above during the Plan Year, the highest paid officer for such year shall be treated as a Highly Compensated -12- 16 Employee. No more than 50 Employees (or, if lesser, the greater of three Employees or 10% of the Employees without regard to any exclusions) shall be treated as officers. A highly compensated former employee includes any employee who is separated from service (or was deemed to have separated from service) prior to the Plan Year, performs no service for the Association during the Plan Year, and was a highly compensated active employee for either the separation year or any Plan Year ending on or after the employee's 55th birthday. If an employee is, during the Plan Year, a family member of either a 5% owner who is an active or former employee or a Highly Compensated Employee who was 1 of the 10 most Highly Compensated Employees ranked on the basis of Compensation paid by the Association during such year, then the family member and the 5% owner or top-10 Highly Compensated Employee shall be aggregated. In such case, the family member and 5% owner or top-10 Highly Compensated Employee shall be treated as a single employee receiving compensation and plan contributions or benefits equal to the sum of such compensation, contributions or benefits of the family member and 5% owner or top-10 Highly Compensated Employee. For purposes of this section, family member includes the spouse, lineal ascendants and descendants of the employee or former employee and the spouses of such lineal ascendants and descendants. For purposes of determining Highly Compensated Employees, Compensation includes elective or salary reduction -13- 17 contributions to a cafeteria plan, cash or deferred arrangement or tax sheltered annuity. 2.23 "Hour of Service" means an "Hour of Service" as defined in Section 4.02(c) hereof. 2.24 "Key Employee" means an employee, former employee or beneficiary of either who, at any time during the Plan Year or any of the 4 preceding Plan Years, is any of the following: (a) an officer of the Association, if his annual compensation exceeds 50% of the amount in effect under Section 415(b)(1)(A) of the Code; provided, however, that for purposes hereof, no more than 50 Employees of the Association (or, if fewer, the greater of 3 Employees or 10% of all Employees within the meaning of Code Section 414(q)(8)) shall be treated as officers of the Association; and, provided, further, that if there are more than 50 officers who are considered Key Employees under this test, only those 50 who had the highest 1-year compensation in the 5-year period ending on the last day of the Plan Year of the determination shall be considered Key Employees; (b) 1 of the 10 Employees owning (or considered as owning within the meaning of Code Section 318) both more than a 0.5% interest and the largest interests in the Association and all Related Companies; provided, however, that an Employee shall not be considered a Key Employee if he earns less Compensation from the Association and all Related Companies than the maximum dollar limitation under Code Section 415(c)(1)(A) in effect for the -14- 18 calendar year in which the Determination Date falls; and provided further that if 2 employees have the same interest, the employee having greater annual compensation shall be treated as having a larger interest; (c) a 5% owner of the outstanding stock or voting power of all stock of the Association or any Related Company (or if the Related Company is not a corporation, of the capital or profit interest in the Related Company); or (d) a 1% owner of the outstanding stock or voting power of all stock of the Association or any Related Company (or of the capital or profit interest in the Association) who has annual earnings from the Association and any Related Company of more than $150,000. For purposes of (b), (c), and (d), subparagraph (C) of Code Section 318(a)(2) shall be applied by substituting 5% for 50%, in the case of any Related Company which is not a corporation, ownership shall be determined in accordance with Regulations issued pursuant to Code Section 416(i)(1)(B)(iii) (II), and the rules of subsection (b), (c) and (m) of Section 414 shall not apply in determining ownership in the Association or any Related Company. Further, in determining the distributions during the last 5 years to be taken into account hereunder, the foregoing shall also apply to distributions under a terminated plan which if it had not terminated would have been required to be included in an Aggregation Group under Section 11.03 hereof. -15- 19 2.25 "Limitation Year" means the Plan Year. 2.26 "Named Fiduciary," for purposes of the Act, means the Association. 2.27 "Net Trust Account Interest" means a Trust Participant's total interest in the Trust Fund, consisting of the value of his undivided share in the cash, securities, and other property in the Stock and Bond Investment Account and the Bond Investment Account, computed and determined as of the valuation date next following the event requiring such determination; provided, however, that if a Participant who has elected to become a Trust Participant for any Fiscal Year dies or retires under the Retirement Plan for Salaried Employees of First Federal of Michigan during such Year, and any contribution to the Trust Fund which may be made for his account for such Year is not waived by him, or by his designated Beneficiary or his estate, as the case may be, such determination of interest and value shall be made as of the next Fiscal Year-end valuation date. 2.28 "Non-Highly Compensated Employee" means an Employee of the Association who is not a Highly Compensated Employee. 2.29 "Non-Key Employee" means an Employee who is not a Key Employee. 2.30 "Normal Retirement Age" means the time an Employee attains age 65. -16- 20 2.31 "Participant" means any Employee who becomes eligible to be a participant in the Plan as provided in Article IV. 2.32 "Plan" means the First Federal of Michigan Salaried Employees' Profit Sharing Plan, as described herein or as hereafter amended. 2.33 "Plan Sponsor," for purposes of the Act, means the Association. 2.34 "Predecessor Company" means a company which has been merged or consolidated with the Association or a Related Company and which prior to such merger or consolidation maintained this Plan and, to the extent determined by the Board of Directors, any other company which has been merged or consolidated with the Association or a Related Company. 2.35 "Profit Sharing Earnings" means for any Fiscal Year, other than the Fiscal Year in which the Company Merger Effective Time occurs, but only for the purposes of the Plan, the consolidated net income of FirstFed Michigan Corporation and its wholly owned subsidiary corporations after all expenses, charges and losses (but before provisions for the Michigan Single Business Tax and taxes based on income and contributions by the Association to the Plan) during the 12-month period beginning December 1 of the year preceding such Fiscal Year and ending November 30 of such Fiscal Year, as determined by FirstFed Michigan Corporation in -17- 21 regularly prepared monthly financial statements approved by the Board of Directors for such period. For the Fiscal Year in which the Company Merger Effective Time occurs, but only for the purposes of the Plan, the projected consolidated net income of FirstFed Michigan Corporation and its wholly owned subsidiary corporations after all expenses, charges and losses (but before provisions for the Michigan Single Business Tax and taxes based on income and contributions by the Association to the Plan) during the period beginning December 1 of the year preceding such Fiscal Year and ending on the last day of the Fiscal Year, determined as follows: (a) First, the consolidated net income of FirstFed Michigan Corporation and its wholly owned subsidiary corporations after all expenses, charges and losses (but before provisions for the Michigan Single Business Tax and taxes based on income and contributions by the Association to the Plan) during the period beginning December 1 of the year preceding such Fiscal Year and ending on the Company Merger Effective Time shall be determined; (b) Such consolidated net income shall then be adjusted to disregard restructuring and other charges undertaken pursuant to Section 3.14 of the Merger Agreement; and (c) Finally, the adjusted consolidated net income shall be further adjusted by dividing such income by the number of days between the December 1 of the year preceding the Fiscal Year -18- 22 in which the Company Merger Effective Time occurs and the Company Merger Effective Time and multiplying the result by 396. Profit Sharing Earnings for the Fiscal Year in which the Company Merger Effective Time occurs shall be determined by the Committee based on the financial statements for FirstFed Michigan Corporation, in a manner consistent with the methodology heretofore utilized by FirstFed Michigan Corporation. 2.36 "Reemployment Commencement Date" means: (a) If an Employee previously has been credited with more than 500 Hours of Service in a computation period and subsequently incurs a Break in Service, the first day on which such Employee is entitled to credit for an Hour of Service after he incurred the Break in Service; and (b) If the Employee is credited with no Hours of Service in any Plan Year commencing after the Reemployment Commencement Date established under subparagraph (a) above, the first day on which the Employee is entitled to credit for an Hour of Service after such Plan Year. 2.37 "Related Company" means, after December 31, 1975, (a) any corporation included with the Association within a "controlled group of corporations," as determined under Code Section 414(b) and Regulations issued pursuant thereto (except that, with respect to the contribution limitation under Section 5.03 hereof, such determination shall be made after substituting the phrase "more than 50%" for the phrase "at least 80%" each -19- 23 place it appears in Section 1563(a)(1) of the Code); (b) any partnership, sole proprietorship, trust, estate, or corporation included within a "parent-subsidiary group of trades or businesses under common control," or a "brother-sister group of trades or businesses under common control," or a "combined group of trades or businesses under common control," as determined under Code Section 414(c) and Regulations issued pursuant thereto; and (c) any corporation, partnership, or other organization which is included within an "affiliated service group," as determined under Code Section 414, including Code Sections 414(b), 414(c), 414(m), 414(n) and 414(o), and Regulations issued pursuant thereto. 2.38 "Separation" means the date of separation from service as reported to official governmental agencies, unless otherwise provided herein, or unless the context otherwise requires. 2.39 "Spouse" or "Surviving Spouse" means a Participant's spouse or surviving spouse to whom the Participant is married on the later of such Participant's benefit starting date or death. 2.40 "Trust Participant" means any Participant who elects to become a trust participant as provided in Section 4.03, and for whom an account in the Trust Fund has been established. 2.41 "Trustee" means the trustee by whom trusteed funds under the Plan are held as provided in Article VII. -20- 24 2.42 "Trust Fund" means the fund held and administered by the Trustee as provided in Article VII. 2.43 "Year of Service" means a "Year of Service" as defined in Section 4.02(a) hereof. 2.44 Where necessary or appropriate to the context, the masculine shall include the feminine, the singular shall include the plural and the plural shall include the singular. ARTICLE III ADMINISTRATION 3.01 ALLOCATION OF RESPONSIBILITY AMONG FIDUCIARIES FOR TRUST ADMINISTRATION. The Fiduciaries shall have only those powers, duties, responsibilities and obligations as are specifically given them under this Trust. In general, the powers, duties, responsibilities and obligations of the Fiduciaries shall be allocated as follows: (a) The Association shall have sole responsibility for making the contributions provided for under Article V and shall have the sole authority to appoint and remove the Trustee and members of the Committee, and an agent of the Plan for the service of legal process, and to amend or terminate this Agreement in whole or in part, as specifically described herein. (b) The Committee shall have the sole responsibility for the administration of the benefit structure of -21- 25 this Plan, including interpretation of the Agreement, as specifically described herein. (c) The Trustee shall have sole responsibility for the administration and management of the assets held under the Trust Fund, as specifically described herein, except to the extent provided in Section 14.01 hereof. 3.02 DELEGATION OF RESPONSIBILITIES. The Association and the Committee shall have the power to delegate specific Fiduciary responsibilities (other than those of the Trustee with respect to the control of the assets of the Trust Fund) to officers or employees of the Association or to other individuals, all of whom shall serve at the pleasure of the Association, by notifying them as to the duties and responsibilities delegated. Any such person may resign by delivering a written resignation to the Association. Vacancies created by resignation, death or other cause may be filled by the Association or the assigned responsibilities may be reassumed or redelegated by the Association. 3.03 MISCELLANEOUS. Each Fiduciary agrees that any directions given, information furnished or action taken by it shall be in accordance with the provisions of this Plan authorizing or providing for such information, direction or action. Furthermore, each Fiduciary may rely upon any such direction, information or action of another Fiduciary as being proper under this Plan and is not required under this Plan to inquire into the propriety of any such direction, information or -22- 26 action. It is intended under this Plan that each Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under this Plan and to the extent permitted by law, shall not be responsible for any act or failure to act of another Fiduciary. 3.04 THE COMMITTEE. (a) APPOINTMENT OF COMMITTEE. A Committee comprised of not less than 3 members shall be appointed by the Board of Directors and shall be considered the administrator of the Plan for purposes of the Act. The term of office of each member of the Committee shall be at the pleasure of the Board of Directors. A member of the Committee may resign upon written notice to the other members of the Committee and to the Board of Directors. In the event of the death, resignation, removal or termination of employment of any member of the Committee, the remaining members shall act as the Committee until a successor shall be appointed by the Board of Directors. (b) COMMITTEE PROCEDURES. The Committee shall act in accordance with the following: (1) The Committee shall make rules and regulations for its procedure and for the complete and equitable administration of the Plan in accordance with the intent, terms and provisions hereof. The Committee may construe this Agreement, shall determine all facts, questions and disputes pertinent to or arising under this Plan or in the course of its administration, shall correct any defect or supply any omission or reconcile any inconsistency and shall do or direct the doing of any act which it deems necessary or expedient for the performance and carrying out of the purposes and intent of this Plan. -23- 27 (2) The Committee shall act by a vote of a majority of the members constituting the Committee at any given time. To the extent permitted by the Act, a dissenting Committee member who, within a reasonable time after he has knowledge of any action or failure to act by the majority, registers his dissent in writing, delivered to the other Committee members, the Association and the Trustee, shall not be responsible for any such action or failure to act. The Association shall keep the Trustee advised as to the membership of the Committee, and the Trustee shall execute, and shall be protected in executing, the written directions of any member or members or other representative of the Committee whom the Association shall certify to have such authority from time to time. (3) The members of the Committee shall be bonded in compliance with the requirements of the Act. The members of the Committee shall serve without compensation for their service as such. It is intended that all expenses of the Committee shall be paid by the Association, but if not so paid shall be paid by the Trustee from the Trust Fund. (4) The Committee shall not be either arbitrary or discriminatory in making any determination of fact, or construction, or in exercising any discretionary power hereunder. No member of the Committee shall participate in any decision made or other action taken with respect to the particular individual and beneficial interest of such Committee member under this Plan; and, in the event the remaining members of the Committee are unable to come to a determination of any such question, the same shall be determined by the Board of Directors of the Association. (5) The Association shall maintain or cause to be maintained such books and records as the Committee shall deem necessary or useful to evidence the interest of each Participant or Trust Participant in the Plan. The Association shall furnish such service and incur such expense as may be reasonably required for the accomplishment of the duties of the Committee under the Plan. (c) COMMITTEE POWERS. The Committee shall administer the benefit structure of the Plan in accordance with its terms and shall have all powers necessary to carry out its terms, including, but not by way of limitation, the following: -24- 28 (1) To determine all questions relating to eligibility of Employees and to the participation in this Plan by Employees. (2) To compute and certify to the Trustee the amount and kind of benefits payable to the Participants and their Beneficiaries. (3) To authorize all disbursements of benefits to Participants or Beneficiaries and all disbursements of reasonable expenses of the Plan and Trust by the Trustee from the Trust Fund. (4) To obtain from the Association, the Trustee, and from Employees such information as shall be necessary for the proper administration of the Plan. (5) To prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan. (6) To furnish the Association, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate. (7) To receive, review and keep on file (as it deems convenient or proper) reports of the financial condition, and of the receipts and disbursements, of the Trust Fund from the Trustee. (8) To adopt and prescribe regulations and procedures to be followed by any Participant or Beneficiary in filing applications for benefits, and for the furnishing and verification of evidence and proofs necessary to establish their rights to benefits under the Plan. (9) To make findings of facts and determinations as to the rights of any Participant or Beneficiary applying for benefits and to afford any such individual dissatisfied with any such finding or determination the right of review. (10) To make and publish such rules for the regulation of the Plan as are not inconsistent with the terms of this Agreement. (11) To purchase insurance, with the consent of the Association, for any Fiduciaries of the Plan to cover liability or losses by reason of the act or omission of a Fiduciary, if such insurance permits recourse by the insurer against the Fiduciary in the case of a breach of a Fiduciary obligation by such fiduciary. -25- 29 The Committee shall have jurisdiction to pass upon all questions concerning the application or interpretation of the provisions of the Plan which it is empowered to administer. The Committee shall have the broadest possible discretion to decide all such questions in accordance with the terms of the Plan, and all such decisions of the Committee shall be final and binding upon the Association, the Employees and the Beneficiaries or claimants under the Plan. The Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. (d) FINALITY OF DECISION. All determinations of the Committee under Section 3.4(c) hereof, shall be final and binding on all persons except as otherwise expressly provided herein. (e) INFORMATION TO BE SUPPLIED BY THE ASSOCIATION. To enable the Committee to perform its functions, the Association shall supply full and timely information to the Committee of all matters relating to the Compensation of all Participants and to the termination of employment of Participants whether by retirement, death or other cause, and such other pertinent facts as the Committee may require. The Committee shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's administration of the Trust. -26- 30 Information furnished hereunder shall be kept confidential except to the extent necessary for administration of the Plan. (f) APPLICATION AND FORMS FOR BENEFITS. The Committee may require a Participant or Beneficiary to complete and file with the Committee an application for a benefit (except when the value of a participant's Account does not exceed $3,500) and all other forms approved by the Committee, and to furnish all pertinent information requested by the Committee. The Committee may rely upon all such information so furnished it, including the current mailing address of the Participant or Beneficiary. ARTICLE IV ELIGIBILITY, PARTICIPATION, YEARS OF SERVICE AND BREAK IN SERVICE 4.01 ELIGIBILITY. An Employee shall have his eligibility to be a Participant in this Plan determined as follows: (a) Any Employee who was a "Participant" in the Plan on December 31, 1975, under the requirements of this Plan as then in effect shall continue to be a Participant in this Plan. (b) Any Employee who on any January 1 or July 1 commencing after December 31, 1975, but prior to January 1, 1989, shall have (1) completed 3 Years of Service with the Association, a Related Company or a Predecessor Company, and (2) attained the age of 21 (25 for Plan Years ending prior to January 1, 1985), shall be a Participant in this Plan. -27- 31 (c) Any Employee who on any January 1 or July 1 commencing after December 31, 1988, and prior to the Company Merger Effective Time, shall have (1) completed 1 Year of Service with the Association, a Related Company, or a Predecessor Company; and (2) attained the age of 21, shall be a Participant in this Plan. (d) Any Employee who, after December 31, 1975, has a Separation shall lose his eligibility to be a Participant effective as of the commencement of the Fiscal Year: (1) in which the Separation occurred, if said Separation occurred during the first 11 months of the Fiscal Year; or (2) following the Separation, if said Separation occurred during the last month of the Fiscal Year; provided, however, that if the Employee's Separation is due to his death or retirement under the Retirement Plan for Salaried Employees of First Federal of Michigan, he shall continue to be a Participant entitled to share in Association contributions for the Fiscal Year of his death or retirement, as the case may be, but not for any succeeding Fiscal Year. Any Participant who shall lose his eligibility as aforesaid, shall, upon rehire, become a Participant on the January 1 or July 1 next following the date of rehire, provided he has satisfied the conditions of 4.01(b). (e) Any Employee who, after December 31, 1975, becomes an Employee as the result of being transferred from a Related Company that has not adopted the Plan or from an employment status other than that of an Employee shall become a -28- 32 Participant on the January 1 or July 1 next following the date of transfer, provided he has satisfied the conditions of Section 4.01(b). (f) Effective for services performed after December 31, 1986, a leased employee who is deemed to be an Employee under Section 2.16(c) hereof, shall become a Participant in and accrue benefits under the Plan based on service as a leased employee. For purposes of the Plan, a "leased employee" means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least 1 year, which services are of a type historically performed by employees in the business field of the recipient employer; provided, however, that if the Internal Revenue Service issues any change in regulations governing the definition of leased employee, the term "leased employee" shall, as of the effective date of such change, be defined in accordance with such regulations. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. 4.02 SERVICE CREDITED UNDER THE PLAN. Service shall be credited under the Plan as follows: -29- 33 (a) YEAR OF SERVICE. The term "Year of Service" means: (1) For service for each Computation Year ending prior to January 1, 1976, an Employee shall receive 1 Year of Service for each year during his last period of continuous employment with the Association or Related or Predecessor Companies prior to January 1, 1976, including such periods of Association approved leave of absence as were authorized under the provisions of the Plan as in effect prior to January 1, 1976. (2) For service for each Computation Year ending after December 31, 1975, an Employee shall be credited with 1 Year of Service in each Computation Year during which he completes at least 1,000 Hours of Service with the Association or Related or Predecessor Companies; provided, however, that: (A) If an Employee has a 1-year Break in Service, Years of Service before such Break shall not be taken into account until he has completed a Year of Service after his return. (B) If an Employee does not have a nonforfeitable right to a benefit under the Plan, Years of Service before any Break in Service shall not be taken into account if the number of consecutive 1-year Breaks in Service equals or exceeds the greater of 5 (1 for Plan Years prior to January 1, 1985) or the Employee's aggregate number of such Years of Service prior to such Break. For purposes hereof, the aggregate number of Years of Service before such Break shall be deemed not to include a Year of Service not required to be taken into account under this subsection by reason of any prior Break in Service. (C) An Employee who in any Computation Year has less than 1,000 Hours of Service with the Association or Related or Predecessor Companies shall accrue no Year of Service for such Computation Year. (D) If as of December 31, 1984, any of an Employee's Years of Service are not required to be taken into account, then the provisions of this Article effective January 1, 1985 shall not be construed as requiring any such Years of Service to be taken into account. -30- 34 (b) BREAK IN SERVICE. After December 31, 1975, an Employee shall be deemed to have a Break in Service on the first day of the Computation Year during which he has not completed more than 500 Hours of Service with the Association, or a Related or Predecessor Company. (c) HOUR OF SERVICE. An Hour of Service which shall be counted for all purposes of this Plan is an Hour of Service as defined in this Section 4.02(c). (1) An Hour of Service is each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Association, or a Related or Predecessor Company, without regard to whether he is then an Employee or eligible to participate in the Plan, during the applicable computation period. Hours of Service shall be credited to the computation period in which the duties are performed. Credit shall be given for the hours actually worked irrespective of the rate of pay for such hours. (2) An Hour of Service is each hour for which an Employee is paid, or entitled to payment by the Association, or a Related or Predecessor Company, without regard to whether he is then an Employee or eligible to participate in the Plan, on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence: (A) No more than 501 Hours of Service are required to be credited under this paragraph (c)(2) to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (B) An hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers' -31- 35 compensation, or unemployment compensation or disability insurance laws; and (C) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. For purposes of this paragraph (c)(2), a payment shall be deemed to be made by or due from the Association, or a Related or Predecessor Company, regardless of whether such payment is made by or due from the Association, or a Related or Predecessor Company, directly or indirectly through, among others, a trust fund or insurance company, to which the Association, or a Related or Predecessor Company, contributes or pays premiums and regardless of whether contributions made by or due to the trust fund, insurer or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. Hours of Service credited hereunder on account of a payment calculated on the basis of units of time, such as hours, days, weeks or months, shall be credited to the computation period or periods in which occurs the period when no duties are performed, beginning with the first unit of time to which the payment relates. If payment is not calculated on the basis of units of time, these hours shall be credited to the computation period during which no duties are performed, or if the period during which no duties are performed extends beyond 1 computation period, such hours shall be allocated, as determined by the Committee, between not more than the first 2 computation periods on any reasonable basis consistently applied to all Employees within the same job classification. (3) An Hour of Service is each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Association, or a Related or Predecessor Company. Crediting of Hours of Service for back pay awarded or agreed to with respect to periods described in paragraph (c)(2) shall be subject to the limitations set forth in that paragraph. These Hours of Service shall be credited to the computation period or periods to which the award or agreement pertains; provided, however, that the Committee, in its sole discretion but acting consistently for all Employees within the same job classification, may, with respect to a period of not more than 31 days which extends beyond 1 computation period, credit all hours to the first computation period or the second computation period. (4) For purposes of construing paragraphs (2) and (3) hereof, the special rules for determining Hours of Service for reasons other than the performance -32- 36 of duties as set forth in 29 C.F.R. Part 2530, Subsection 2530.200 b-2(b) are by this reference incorporated herein. (5) Employees (A) whose compensation is not determined on the basis of specified amounts for each Hour of Service worked during a given period, (B) whose hours are not required to be counted and recorded by any federal law, and (C) whose hours are not specifically counted and recorded by the Association, a Related Company or a Predecessor Company, shall be credited with Hours of Service at the rate of 45 Hours of Service per week for any week during which they would otherwise be credited with at least 1 Hour of Service hereunder. (6) For purposes of computing the Hours of Service of an Employee whose service with the Association, or a Related or Predecessor Company, as calculated under paragraphs (1), (2), (3), (4) or (5) hereof, is interrupted: (A) for periods of absence consented to by the Association; or (B) on account of absence due to service in the armed forces of the United States, provided that the Employee shall have applied and been accepted for reemployment within 90 days after the earlier of (i) termination of such service, or (ii) 4 years of such service or such other greater period as may be provided under the Vietnam Era Veterans' Readjustment Act of 1974, as amended from time to time, the period of interruption shall be considered a period of regular employment during which the Employee is credited based on a 40-hour week or a pro rata portion thereof. The discretion of the Association to grant or withhold consent to a leave of absence of an Employee shall not be exercised in such manner as to discriminate in favor of Employees who are officers, shareholders, persons whose principal duties consist of supervising the work of other Employees or Highly Compensated Employees. In all cases other than leaves of absence arising from military service, if request is made by the Participant's employer that such Participant on leave of absence return to active service, and such Participant does not do so within 10 days after the date of such request, his leave of absence shall be considered to have terminated at the end of the 10th day succeeding the date of such request. If a Participant does not return to active service with the Association upon termination of his leave of absence, the date of termination of such leave of absence shall be -33- 37 considered as the date of termination of such Participant's employment with the Association. (7) In the event there are insufficient records documenting Hours of Service completed by one or more Participants prior to January 1, 1976, the Committee may use for the purpose of determining such Hours of Service whatever records are reasonably acceptable to it and may make whatever calculations are necessary to determine the approximate Hours of Service completed during such prior period or periods. (8) Anything to the contrary herein notwithstanding, an Employee entitled to credit for an Hour of Service under any of the provisions of this Section 4.02(c) shall not be entitled to additional credit for the same Hour of Service under any other provision of Section 4.02(c). (9) Solely for purposes of determining whether a Break in Service has occurred for participation and vesting purposes in any Plan Year beginning on or after January 1, 1985, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such Hours cannot be determined, 8 Hours of Service per day of such absence; provided, however, that the total number of hours treated as Hours of Service by reason of any such maternity or paternity shall not exceed 501 hours. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (A) by reason of the pregnancy of an individual, (B) by reason of a birth of a child of the individual, (C) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (D) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (A) in the Plan Year in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or (B) in all other cases, in the following Plan Year. No credit will be given pursuant hereto unless the Employee furnishes to the Committee such timely information as the Plan may reasonably require to establish that the absence from work is for reasons referred to above and the number of days for which there was no such absence. (10) Solely in determining whether an Employee has incurred a Break in Service for purposes of eligibility to participate, any period of unpaid leave of absence which is considered an "FMLA leave" under -34- 38 regulations issued pursuant to the Family and Medical Leave Act of 1993 shall not be treated as or counted toward a Break in Service. No Hours of Service shall be counted during any period of unpaid FMLA leave for purposes of determining an Employee's Years of Service. 4.03 ELECTION TO BE A TRUST PARTICIPANT. Subject to the limitations in Section 6.04, in each Fiscal Year during which the Plan shall be continued, each Participant may elect to become a Trust Participant as to all, or 3/4, or 1/2, or 1/4 of the amount to be allocated to him for such Fiscal Year under the provisions of the Plan; provided, however, that any minimum allocation to a Trust Participant under Section 11.01 shall automatically be allocated to the Trust Fund on his behalf. To make the election for any Fiscal Year (or, with respect to a Participant who commences his participation on July 1 of a Fiscal Year, for the second half of such Year), each Participant shall complete and return to the Committee on or before October 31 of such Year (August 31 of the Fiscal Year in which the Company Merger Effective Time occurs), a form furnished for that purpose by the Committee. Such Participant shall indicate on such form whether he elects to have the amount allocated to the Trust Fund on his behalf for such Fiscal Year, invested in the Stock and Bond Investment Account or the Bond Investment Account. ARTICLE V CONTRIBUTIONS 5.01 AMOUNT. Except as hereinafter limited, for each Fiscal Year beginning with the Fiscal Year 1976 and ending with the Fiscal Year ending December 31, 1988, the Association shall -35- 39 contribute for the purposes of the Plan, on or before the last day of such Fiscal Year, an amount equal to 3.5% of Profit Sharing Earnings for such Fiscal Year. Except as hereinafter limited, for each Fiscal Year beginning with the Fiscal Year 1989, the Association shall contribute for the purpose of the Plan, on and before the last day of such Fiscal Year, an amount equal to 4.5% of Profit Sharing Earnings for such Fiscal Year. For any Fiscal Year in which 3.5% (4.5% for Plan Years beginning after December 31, 1988) of Profit Sharing Earnings is less than 15% of the aggregate Compensation of Participants for such Fiscal Year, the Association's Board of Directors may, at its sole discretion, utilize any part of or all of the Carry-Forwards from any or all of the 3 immediately preceding Fiscal Years to make a supplemental contribution for such Fiscal Year. In no event, however, shall the contribution (including any supplemental contribution) for any Fiscal Year (or for the Fiscal Year in which the Company Merger Effective Time occurs, during the period from January 1 through the Company Merger Effective Time) total more than 15% of the aggregate Compensation of Participants for such Fiscal Year (or for the Fiscal Year in which the Company Merger Effective Time occurs, during the period from January 1 through the Company Merger Effective Time). Notwithstanding anything herein to the contrary, it is hereby determined that there shall be no Carry-Forward from Fiscal Years 1970 and 1971, but that there is a Carry-Forward available from Fiscal Year 1972 in an amount of $56,510. For any Fiscal Year, the allocation of the foregoing contributions among First Federal of Michigan and other -36- 40 participating employers shall be at the discretion of the Board of Directors of First Federal of Michigan. 5.02 COMPUTATION. The computation of the contribution for each Fiscal Year shall be made by the Association and shall, prior to payment, be reviewed by independent certified public accountants of recognized standing selected by the Association who may be the regular independent public accountants of the Association employed by the Board of Directors, and, upon notice from such accountants that they have reviewed such computation and have no exception thereto, such computation shall finally determine the amount of the contribution for all purposes of the Plan. 5.03 LIMITATION ON CONTRIBUTIONS. Notwithstanding any other provision of this Agreement, the Association shall not contribute for any Fiscal Year to the Trust Fund, as contemplated by Section 7.01, any amount in excess of the amount allowable as a deduction by the Association when paid under the applicable provisions of the Code. The allocation to the Account of any Participant for any Limitation Year commencing on or after January 1, 1987 due to Association contributions, forfeitures, amounts allocable after June 30, 1984 to an individual medical account and amounts attributable to post-retirement medical benefits within the meaning of Sections 415(l)(2) and 419A(d)(3) of the Code, respectively (collectively referred to herein as "annual additions") shall not exceed the lesser of (i) $30,000 as adjusted -37- 41 by the Adjustment Factor, or (ii) 25% of the Participant's Compensation for the Limitation Year. The Compensation limitation referred to in Section 5.03(ii) above shall not apply to any contribution for medical benefits (within the meaning of Section 401(h) or 419A(f)(2) of the Code) after separation from service which is otherwise treated as an annual addition under Section 415(l)(2) or 419A(d)(3) of the Code. Contributions shall not fail to be considered annual additions merely because such contributions are Excess Deferral Amounts or Excess Deferral Contributions or merely because such Excess Deferral Amounts and Excess Deferral Contributions are corrected through distribution. Notwithstanding any other provision of this Plan, if any annual additions are allocated under this and other defined contribution plans maintained by the Association with respect to an Employee also participating in this Plan, and the Association contribution that would otherwise be contributed or allocated to the Participant's account under this Plan would cause the annual additions for the Limitation Year to exceed said limitation, the amount contributed or allocated under this Plan will be reduced so that the amount allocated to the Participant under all such Plans for each Limitation Year will not exceed said limitation, after first reducing Association contributions and forfeitures to the Participant under such other plans, if any, so as not to exceed the foregoing limitation. In addition, if a Participant is a participant at any time in this Plan and any defined benefit plan maintained by -38- 42 the Association or any Related Companies, then the Association shall reduce the rate of annual additions for such Participant in this Plan to the extent necessary (in the manner set forth in the preceding paragraph), before taking into account reductions in benefit accruals and annual additions under other plans of the Association and Related Companies, to prevent the sum of the following fractions, computed as of the close of the Limitation Year, from exceeding 1.0: (a) The Participant's projected annual benefit under the defined benefit plans over the lesser of: (1) The product of 1.25, multiplied by the dollar limitation determined under Section 415(b) and (d) of the Code for such Limitation Year; or (2) The product of 1.4 multiplied by 100% of the Participant's average Compensation, including any adjustments under Section 415(b) of the Code, for the 3 consecutive Years of Service with the Association that produces the highest amount. For purposes hereof, the "projected annual benefit" is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity) or qualified joint and survivor annuity to which the Participant would be entitled under the terms of the plan assuming the Participant will continue employment until Normal Retirement Age under the plan (or current age, if later), and the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the plan will remain constant for all future Limitation Years. -39- 43 Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Association which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125% of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Section 415 for all Limitation Years beginning before January 1, 1987. (b) The sum of the annual additions to the Participant's account under this and any other defined contribution plans as of the close of the Limitation Year over the sum of the lesser of the following amounts for such Year and for each prior Year of Service with the Association: (i) The product of 1.25, multiplied by the dollar limitations determined under Section 415(c)(1)(A) of the Code for such year (determined without regard to subsection 415(c)(6)) as adjusted by the Adjustment Factor; or (ii) The product of 1.4, multiplied by 25% of the Participant's Compensation for such year. For the purposes of computing the defined contribution plan fraction for any year as referred to in Section 5.03(b) hereof: -40- 44 (1) the "dollar limitation" applicable under Section 5.03(b)(ii) hereof during each of such prior Years of Service with a Predecessor Company occurring on or before January 1, 1976 shall be $25,000; and (2) contributions made on behalf of the Participant to a Plan established by any Predecessor Company shall be included in computing the sum of the annual additions to the Participant's Account under Section 5.03(b)(ii) hereof. If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Association which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of the excess of the sum of the fractions over 1.0 times the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 6, 1986, but using the Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. The annual addition for any Limitation Year beginning before January 1, 1987, shall not be recomputed to treat all voluntary Participant contributions as an annual addition. -41- 45 For purposes of applying the foregoing, all employers of a controlled group of corporations (as defined by Code Section 414(b)), and all employers which are under common control (as defined by Code Section 414(c), as modified by Code Section 414(h)), shall be considered a single employer and included in the definition of the term "Association." If the amount of annual additions to any Participant's account are reduced by reason of this Section 5.03 and Section 415 of the Code or if thereafter it is determined that the annual additions under the Plan would cause the limitations of this Section 5.03 and Section 415 of the Code applicable to that Participant for the Limitation Year to be exceeded as the result of allocation of forfeitures, a reasonable error in estimating the Participant's annual compensation or under other limited facts and circumstances acceptable to the Commissioner of the Internal Revenue Service, then the excess elective deferrals and other amounts shall be paid to the Participant in cash as soon as administratively feasible. The Association shall advise an affected Participant of any limitation upon allocation to his Account required by this provision. Anything in this Plan to the contrary notwithstanding, in no event shall an allocation be made to any Participant which exceeds the revised limitations under Section 415 of the Code, as established under the Tax Reform Act of 1986, and as amended. -42- 46 ARTICLE VI ALLOCATION OF CONTRIBUTIONS 6.01 GENERAL. Subject to prior satisfaction of the minimum contribution requirements of Section 11.01, if applicable, the amounts to be contributed by the Association with respect to any Fiscal Year shall be allocated on or before the end of such Year proportionately among Participants on the basis of their respective amounts of Compensation for such Year (or for the Fiscal Year in which the Company Merger Effective Time occurs, the portion of such Fiscal Year through the Company Merger Effective Time). The amount allocated to each Participant for such Year (or for the Fiscal Year in which the Company Merger Effective Time occurs, the portion of such Fiscal Year through the Company Merger Effective Time), shall be that portion of the total contribution that the Compensation of such Participant for such Year (or for the Fiscal Year in which the Company Merger Effective Time occurs, the portion of such Fiscal Year through the Company Merger Effective Time) bears to the aggregate Compensation of all such Participants for such Year (or for the Fiscal Year in which the Company Merger Effective Time occurs, the portion of such Fiscal Year through the Company Merger Effective Time). 6.02 FULL CASH PAYMENT TO NON-TRUST PARTICIPANTS. The amount allocated for any Fiscal Year to a Participant who fails to elect to be a Trust Participant for such Year's allocation as provided in Section 4.03, other than any minimum contribution under Section 11.01, shall be paid by the Association in cash to -43- 47 such Participant promptly after the amount of his allocation has been determined. 6.03 PARTIAL CASH PAYMENT TO TRUST PARTICIPANTS. 3/4, or 1/2, or 1/4, as the case may be, (or such lesser amount as required by the limitations set forth in Section 5.03 and Section 6.04), of the amount allocated for any Fiscal Year to a Participant who elects for such Year to be a Trust Participant as to 1/4, or 1/2, or 3/4 of the amount of such Year's allocation as provided in Section 4.03, other than any minimum contribution under Section 11.01, shall be paid by the Association in cash to such Participant promptly after the amount of his allocation and such limitations have been determined. 6.04 COMPLIANCE WITH STATUTORY LIMITATIONS. The following limitations shall apply to the amounts allocated to a Participant under the Trust Fund in any Fiscal Year: (a) After December 31, 1986, no Participant shall be permitted to have any amount allocated to his Account in the Trust Fund during any calendar year in excess of $7,000, as adjusted by the Adjustment Factor. (1) If, in any calendar year, a Participant's aggregate elective deferrals under this Plan to be paid over to the Trust Fund, any other qualified cash or deferred arrangement (as defined in Section 401(k) of the Code), simplified employer pension plan (as defined in Section 408(k) of the Code), eligible deferred compensation plan under Section 457 of the Code and plan as described under Section 501(c)(18) exceed $7,000, as adjusted by the Adjustment Factor, or, if in combination with a tax deferred annuity as defined in Section 403(b) of the Code exceed the greater of $7,000, as adjusted by the Adjustment Factor, or $9,500, then no -44- 48 later than the first March 1 following the close of the calendar year, the Participant shall notify this Plan in writing, specifying (A) the amount of excess deferral (the "Excess Deferral Amount") which the Participant allocates to this Plan for the preceding calendar year and claims a distribution, and (B) that if such Excess Deferral Amount is not distributed, the excess plus amounts deferred under other plans or arrangements described in Sections 401(k), 408(k), 457, 501(c)(18) and 403(b) of the Code, will exceed the dollar limitation imposed for the calendar year under Section 402(g) of the Code. (2) If any Participant timely submits a claim, then notwithstanding any other provision of this Plan, no later than the first April 15 following the close of the calendar year, any Excess Deferral Amounts allocated to this Plan and income allocable thereto shall be distributed to the Participant. The Excess Deferral Amount distributed to a Participant with respect to a Plan Year shall be reduced by any Excess Deferral Contribution previously distributed with respect to such Participant for the Plan Year. Excess Deferral Amounts plus any income and minus any loss allocable thereto shall be designated by the Association as distributions of Excess Deferral Amounts (and income) and distributed by the April 15 following the close of the Plan Year for which such deferrals are made. The income or loss allocable to Excess Deferral Amounts shall be determined by multiplying the income or loss allocable to the amounts actually paid over to the Trust Fund on behalf of a Participant for the Plan Year by a fraction, the numerator of which is the Excess Deferral Amount on behalf of the Participant for the Plan Year and the denominator of which is the amount of the Participant's Account balance attributable to amounts actually paid over to the Trust Fund on behalf of a Participant on the last day of the Plan Year, reduced by the gain allocable to such total amount for the Plan Year and increased by the loss allocable to such total amount for the Plan Year. The income distributable with respect to Excess Deferral Amounts for the period between the end of the Plan Year and the date of the corrective distribution (the "gap period") shall be determined by multiplying income or loss allocable to the Participant's Account under Article VIII for the gap period by a fraction, the numerator of which is the Excess Deferral Amount on behalf of the Participant for the prior Plan Year and the denominator of which is the amount of the Participant's Account balance attributable to amounts actually paid over to the Trust Fund by the Participant on the last -45- 49 date of the prior Plan Year. Anything to the contrary notwithstanding, for the 1987 Plan Year, the Committee may use any reasonable method for computing the income allocable to Excess Deferral Amounts. If there is a loss allocable to the Excess Deferral Amount, said adjustment shall in no event be greater than the lesser of the Participant's Account under the Plan or the Participant's amounts actually paid over to the Trust Fund for the Plan Year. (3) All elections shall be made in the manner and subject to the conditions specified by the Committee, which shall prescribe uniform and nondiscriminatory rules for such elections, provided that a Participant's election to commence to have amounts contributed to the Trust on his behalf must remain in effect until modified or terminated. (b) In any Plan Year, the Actual Deferral Percentage for contributions of Participants who are Highly Compensated Employees to the Trust Fund shall not exceed the greater of: (i) the Actual Deferral Percentage of all Participants who are Nonhighly Compensated Employees multiplied by 1.25 (the "1.25 Test"), or (ii) the lesser of the Actual Deferral Percentage of such Participants who are Nonhighly Compensated Employees multiplied by 2, or 2 percentage points plus the Actual Deferral Percentage of all Participants who are Nonhighly Compensated Employees (the "2-2% Test). For purposes of this Section 6.04: (1) The Actual Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have contributions allocated to his account under two or more plans or arrangements described in Section 401(k) of the Code that are maintained by the Association or a Participating Company shall be determined as if all such contributions were made under a single arrangement. (2) If an eligible Highly Compensated Employee is subject to the family aggregation rules of -46- 50 Section 414(q)(6) because such Employee is either a 5% owner or 1 of the 10 most Highly Compensated Employees, the combined Actual Deferral Percentage ratio for the family group (which is treated as 1 Highly Compensated Employee) for purposes of computing the Actual Deferral Percentage shall be the Actual Deferral Percentage ratio determined by combining the amounts contributed to the Trust Fund and Compensation of all the eligible Family Members. If the Actual Deferral Percentage ratio is required to be reduced under Section 6.04(b)(3) below, the Excess Deferral Contributions for a family unit are to be allocated among Family Members in proportion to the contributions of each Family Member that are combined to determine the reduced Actual Deferral Percentage ratio. If an employee is required to be aggregated as a member of more than one family group in a plan, all eligible employees who are members of those family groups that include that employee shall be aggregated as 1 family group. (3) If, in applying Section 6.04(b), there are Excess Deferral Contributions, the amount of the Excess Deferral Contributions for a Highly Compensated Employee shall be determined under a leveling method under which the actual deferral ratio of the Highly Compensated Employee with the highest actual deferral ratio is reduced to the extent required to satisfy the Actual Deferral Percentage test or cause the Highly Compensated Employee's actual deferral ratio to equal the ratio of the Highly Compensated Employee with the next highest actual deferral ratio. The foregoing shall be repeated until the Actual Deferral Percentage test is satisfied. (4) The determination of the Actual Deferral Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (5) Excess Deferral Contributions plus any income and minus any loss allocable thereto shall be designated by the Association as a distribution of Excess Deferral Contributions (and income) and distributed if feasible within 2-1/2 months after the close of the Plan Year for which such Contributions are made but in no event later than the last day of each Plan Year beginning after December 31, 1989, to the appropriate Highly Compensated Employees to whose accounts such Excess Deferral Contributions were allocated for the preceding Plan Year. -47- 51 (6) The income or loss allocable to Excess Deferral Contributions shall be determined by multiplying the income or loss allocable to the Participant's contribution to the Trust Fund for the Plan Year by a fraction, the numerator of which is the Excess Deferral Contribution on behalf of the Participant for the Plan Year and the denominator of which is the sum of the Participant's Account balance attributable to contribution to the Trust Fund on the last day of the Plan Year, reduced by the gain allocable to such total amount for the Plan Year and increased by the loss allocable to such total amount for the Plan Year. The income distributable with respect to Excess Deferral Contributions for the period between the end of the Plan Year and the date of the corrective distribution (the "gap period") shall be determined by multiplying the income or loss allocable to the Participant's Account for the period between the end of the prior Plan Year and the last day of the month before the end of the gap period by a fraction, the numerator of which is the Excess Deferral Contribution on behalf of the Participant for the prior Plan Year and the denominator of which is the amount of the Participant's Account balance attributable to amounts paid over to the Trust Fund by the Participant on the last day of the prior Plan Year. Anything to the contrary notwithstanding, for the 1987 Plan Year, the Committee may use any reasonable method for computing the income allocable to Excess Deferral Contributions. ARTICLE VII TRUST FUND 7.01 ALLOCATION OF TRUST FUND CONTRIBUTIONS. Subject to the limitations set forth in Section 5.03 and Section 6.04, the amounts, or 3/4, or 1/2, or 1/4 of the amounts, as the case may be, allocated for each Plan Year to Participants who elect to be Trust Participants with respect to such allocations, or who are Trust Participants due to a minimum contribution under Section 11.01, shall be paid by the Association in cash to the Trustee as a contribution to a tax-exempt employees' trust promptly after the amounts allocated have been determined. -48- 52 7.02 Ownership of Trust Fund. All amounts paid to and received by the Trustee as contributions shall be received by it for the Trust Fund to be held and administered by it in accordance with the terms hereof. All interest of the Association in any funds so contributed by it to the Trustee hereunder, or the increment or proceeds thereof, shall cease and terminate upon the making of any such contribution, and no part of the Trust Fund or increment, income or proceeds thereof, nor any beneficial interest under the Trust, shall in any event revert to the Association or be used for or diverted to purposes other than for the exclusive benefit of Trust Participants or their Beneficiaries hereunder except that pursuant to Section 403(c)(2) of the Act, the Association may recover a contribution if it was made by mistake of fact, or conditioned upon the initial qualification of the Plan or any amendment thereof or upon the deductibility of the contribution under Section 404 of the Code (to the extent disallowed). In order to recover such contribution, the Association must make a written request to the Trustee and the contribution must be returned within 1 year after the payment of the contribution, the denial of the qualification (but, as to initial qualification, only if the application for the determination of qualification is made by the time prescribed by law for filing the Association's return for the taxable year in which the Plan was adopted) or the disallowance of the deduction, respectively. 7.03 ADMINISTRATION OF TRUST FUND. The Trust Fund will consist of the initial contribution made by the Association, as -49- 53 provided in Article I above, and all subsequent contributions by the Association to the Trustee, as provided in Section 7.01, and all investment or reinvestment thereof, increased by earnings, increments, or proceeds thereof, and diminished by any net losses thereof, all proper deductions for administrative and other expenses if the Association shall not pay them, and distributions and disbursements made to or for the account of Trust Participants or their Beneficiaries in accordance with Article X below. 7.04 INVESTMENT. The Trust Fund shall be held for investment and reinvestment by the Trustee in two accounts designated the "Stock and Bond Investment Account" and the "Bond Investment Account," as provided in Article XIV. The Stock and Bond Investment Account shall be a general fund and shall consist of all assets of the Trust Fund other than assets irrevocably allocated to the Bond Investment Account by an election made in the manner and on the terms and conditions hereinafter provided. 7.05 ELECTION OF FORM OF INVESTMENT. An election may be made to irrevocably allocate assets to the Bond Investment Account as follows: (a) CURRENT CONTRIBUTIONS. On or before October 31 of each Fiscal Year, a Trust Participant may elect to have the entire amount of contribution which is allocated to the Trust Fund on his behalf for such Fiscal Year invested in the Bond Investment Account. -50- 54 (b) BALANCE OF ACCOUNT. By written notice to the Committee on or before October 31, a Trust Participant (but not Beneficiaries) may elect to transfer his entire interest in the Stock and Bond Investment Account to the Bond Investment Account as of the next following Year-end valuation date under either of the following circumstances: (1) If such Participant retires on or after the age of 65 years or pursuant to the Early or Total and Disability Retirement provisions of the Retirement Plan for Salaried Employees of First Federal of Michigan (or if such Plan has been terminated, such Participant terminates employment under circumstances that would have made him eligible for Early Retirement under said Plan if it had then been in effect), he may elect to transfer his entire interest in the Stock and Bond Investment Account to the Bond Investment Account as of the Year-end valuation date coinciding with or immediately following such retirement. (2) Prior to such Trust Participant's retirement pursuant to the provisions of Section 7.05(b)(1), he may elect to transfer his entire interest in the Stock and Bond Investment Account to the Bond Investment Account as of any Year-end valuation date coinciding with or following the date on which he shall have attained at least the age of 50 years (60 years for the December 31, 1984 valuation date and valuation dates prior thereto). The Committee shall notify the Trustee on or before each valuation date of the amounts to be transferred to the Bond Investment Account as of such date. All transfers shall be made based upon account values as of the valuation date although the Trustee may effectuate the transfer at such time or times thereafter and in such manner as may be, in the sole discretion of the Trustee, in the best interest of all Trust Participants. -51- 55 7.06 COMMON FUND. The Stock and Bond Investment Account and the Bond Investment Account shall each be considered a common Account in which the share of each Participant shall consist of an undivided interest in the respective assets of that Account. Each Participant's share in an Account shall be measured by the proportion that the net credits to his separate account bears to the total net credits to the accounts of all Participants in that Account as of the date that such share is being determined. Prior to the distribution dates hereinafter specified or the times when payments are made in conformity with the provisions of this Plan, the Participants, their Beneficiaries, heirs-at-law, or legal representatives shall receive no cash or other thing of current exchangeable value either from the Association or from the Trustee on account of or as a result of the Funds created. 7.07 REVALUATION. As of December 31, 1961, and as of each succeeding December 31, with appropriate reservation of any current contribution received, the Trustee shall determine the net earnings or the net loss of the Stock and Bond Investment Account and the Bond Investment Account, including net capital gains or losses, if any, for the Fiscal Year ending on such date or since the last more recent determination, and shall revalue the Stock and Bond Investment Account and the Bond Investment Account, respectively, so as to reflect the increase or decrease in the value of the investments of each such Account as compared with the value of such investments as of the date of investment or of a subsequent revaluation. Upon written instruction from the -52- 56 Committee, the Trustee shall make a similar determination and revaluation as of the end of any intervening calendar quarter. Each such revaluation shall be made by the Trustee at current market value, and its determination shall promptly be certified to the Committee and the Association. 7.08 TERMINATION OF TRUST FUND. In the event of the termination of the Trust Fund under this Agreement, the Trust Fund shall be liquidated as soon as practicable and a final determination of the net earnings or loss of the Stock and Bond Investment Account and the Bond Investment Account, and a final determination of total value shall then be made as to the Stock and Bond Investment Account and the Bond Investment Account, generally in accordance with the provisions of Section 7.07, to reflect the improvement or impairment of the Stock and Bond Investment Account and the Bond Investment Account since the most recent determination, for the purpose of enabling the Committee and the Association to adjust and determine the then value of each Trust Participant's individual account in the Trust Fund for distribution upon such termination. 7.09 COLLECTIVE INVESTMENTS BY TRUSTEE. Notwithstanding any other provision of this instrument, the Trustee may cause any part or all of the assets of this Trust to be invested collectively with the money and other assets of trusts created by others by causing such money and other assets to be invested as part of any common, collective or commingled trust fund, as the same may have heretofore been or may hereafter be -53- 57 established by any corporate Trustee, which is qualified under the provisions of Section 401(a) and exempt under the provisions of Section 501(a) of the Code, as the same may be amended. The money and other assets of this Trust so added to any such common, collective or commingled trust fund maintained by such Trustee shall be subject to all of the provisions of the declaration of trust, as the same may be amended, under which any such common, collective or commingled trust fund shall be maintained and for the period of any such collective investment of assets of this Trust such declaration of trust, as the same may be amended, shall constitute a part of this instrument. 7.10 INVESTMENT IN WOODWARD FUNDS. Notwithstanding anything to the contrary, the Trustee is expressly authorized to invest any portion of the assets of the Trust Fund in any 1 or more of the Woodward Funds with respect to which the Trustee is also acting as investment advisor, custodian, or transfer and dividend disbursing agent, including the investment in additional shares of any 1 or more of the Woodward Funds with fees rebated to the Trust by the Trustee. The Trustee shall be entitled to receive fees for its acting as investment advisor, custodian, or transfer and dividend disbursing agent for the Woodward Funds so long as the Trustee rebates to the Trust the Trust's pro rata share of all fees paid to the Trustee by the Woodward Funds. -54- 58 ARTICLE VIII ACCOUNTS OF TRUST PARTICIPANTS 8.01 ESTABLISHMENT OF ACCOUNT. The Association shall establish and maintain a credit account for each Trust Participant, showing the balance of each Trust Participant's Net Trust Account Interest in the Stock and Bond Investment Account and the Bond Investment Account of the Trust Fund, and for such other purposes as may be useful in the administration of the Trust under this Agreement, and shall cause to be furnished to each Trust Participant annually a statement of his Net Trust Account Interest. The fact that accounts are established and maintained shall not be construed to mean under any circumstances or event that any Trust Participant has title to any specific asset held in Trust hereunder. 8.02 ALLOCATION OF CONTRIBUTION. The Association shall allocate and credit each contribution to the Trust Fund to and among the accounts of Trust Participants sharing in such contribution in the exact amounts determined under Section 6.01, Section 7.01 and Section 11.01, if applicable, subject to the limitations of Section 5.03 and Section 6.04, and in accordance with their election of the Stock and Bond Investment Account or Bond Investment Account under Section 7.05(a). 8.03 ALLOCATION OF IMPROVEMENT OR IMPAIRMENTS. The Association shall allocate to each Trust Participant in the Trust Fund a portion of the improvement or impairment of the Stock and Bond Investment Account and the Bond Investment Account of the -55- 59 Trust Fund as provided in Section 7.07, such portion being determined by the use of the ratio which the balance of each such credit account in the Stock and Bond Investment Account or the Bond Investment Account immediately prior to adjustment bears to the total of the respective balances of all such credit accounts immediately prior to such adjustment. Such adjustment shall be made prior to recognition of the Association's contribution to the Trust Fund for the current Fiscal Year. 8.04 CURRENT VALUE OF PARTICIPANT'S ACCOUNT. Each credit account consisting of a Trust Participant's interest in the Stock and Bond Investment Account and the Bond Investment Account in the Trust Fund, when and as determined or redetermined as above provided, shall, until the next redetermination thereof, stand as the fixed value of the Trust Participant's current Net Trust Account Interest in the Trust Fund, subject only to interim addition or deduction, if any, for his individual account. Any distribution from the Trust Fund made to or for the account of a Trust Participant shall be charged forthwith to his account by the Association as provided herein. 8.05 ALLOCATIONS IN EVENT OF TERMINATION OF TRUST FUND. In the event of termination of the Trust Fund under this Agreement, and upon liquidation of the Trust Fund as provided in Section 7.08, adjustments of the accounts of Trust Participants in the Trust Fund shall be made by allocation, generally in accordance with the foregoing Sections of this Article, of the improvement or impairment of the Stock and Bond Investment Account -56- 60 and the Bond Investment Account, respectively, since the most recent determination. ARTICLE IX LISTS CERTIFIED TO COMMITTEE 9.01 GENERAL. The Association shall keep the Committee informed as to Employees eligible to participate from time to time, and, concurrently with the Association's contribution to the Trust Fund, shall certify to the Committee a list of all the Employees of the Association eligible to participate therein showing the exact amount of the contribution to be credited to each eligible Employee's account as a Trust Participant, and opposite the name of each such person in such list there shall be set forth the following: (a) His address; (b) Date of his birth; (c) His Employment Commencement Date; (d) Date on which he became a Participant; (e) His Compensation during the Plan Year; and (f) Such other pertinent information as the Trustee or the Committee shall request. 9.02 TERMINATED PARTICIPANTS. As soon as practicable the Association shall furnish to the Committee a list of the names of the persons who ceased to be Participants during the preceding Plan Year, with a statement of the date and reason such persons respectively ceased being Participants. Information furnished -57- 61 under this Article IX shall be kept confidential, except to the extent necessary for administration of the Plan. 9.03 ADDITIONAL INFORMATION. In addition to the foregoing, the Association shall upon request furnish the Committee such additional information regarding Employees and Trust Participants and their accounts as the Committee may reasonably require or request for the purposes of administering the Plan. ARTICLE X DISTRIBUTION OF BENEFITS FROM THE TRUST FUND 10.01 WITHDRAWALS DUE TO HARDSHIP. A Trust Participant may withdraw all or a part of his interest in the Trust Fund attributable to contributions to the Trust Fund (but after December 31, 1988 may not withdraw any earnings thereon) by submitting his written request to the Committee at such time and in such manner as shall be prescribed by the Committee. (a) The withdrawal request must be for an immediate and heavy financial need of the Participant and cannot exceed the actual amount necessary to meet the immediate financial need created by the hardship, and in no event will any such request be granted if not made due to an immediate and heavy financial need, which shall be limited to: an emergency involving serious illness, injury or accident, payment of unanticipated expenses for tuition for the next quarter or semester of post-secondary education of the Participant, his Spouse, children -58- 62 or dependents, the Participant unexpectedly being placed on suspended service status by the Association, or the Participant's purchase of a primary residence (excluding mortgage payments) under emergency circumstances. Where the Trust Participant's Account is invested in both the Stock and Bond Investment Account and in the Bond Investment Account, the application shall indicate the proportion of the withdrawal which is to be made from the Stock and Bond Investment Account and that to be made from the Bond Investment Account. If the Committee shall find that the applicant has an immediate and heavy financial need that constitutes an extreme hardship as set forth above, the Committee shall direct the Trustee to make a distribution from either the Stock and Bond Investment Account or the Bond Investment Account of the Trust Fund, or both, in the proportions requested by the Participant, to or for the account of the Trust Participant in such amount, not in excess of the amount of contributions on behalf of the Trust Participant to the Trust Fund (excluding earnings thereon), as then appearing on the records of the Association as the Committee shall determine to be required for relief in the particular case, provided, that if the occasion for distribution is not attributable to a financial hardship due to suspended service or approved leave of absence by reason of sickness or accident, the distribution shall not exceed the amount of the contributions on behalf of the Participant to the Trust Fund as appearing on the records of the Association 24 full calendar months prior to the distribution. -59- 63 (b) With respect to withdrawal requests occurring on or after January 1, 1990, in order to obtain a hardship distribution, a Participant shall represent that the need cannot be relieved: (1) Through reimbursement or compensation by insurance or otherwise, (2) By reasonable liquidation of the Participant's assets, to the extent such liquidation would not itself cause an immediate and heavy financial need, (3) By cessation of contributions on his behalf under the Plan, or (4) By other distributions or nontaxable (at the time of the loan) loans from plans maintained by the Association or by any other employer, or by borrowing from commercial sources on reasonable commercial terms. For purposes hereof, the Participant's resources shall be deemed to include those assets of his spouse and minor children that are reasonably available to him. (c) Furthermore, with respect to any withdrawal requests occurring on or after January 1, 1990, a Participant requesting a distribution shall: (1) Sign an affidavit stating he has taken all distributions and nontaxable loans currently available under all plans of the Association; (2) Agree that contributions on his behalf and his elective contributions and employee contributions to all other plans maintained by the Association will be suspended for at least 12 months after receipt of any hardship distribution hereunder; (3) Agree that contributions on his behalf shall not be made to the Trust Fund for the Participant's taxable year occurring immediately after the taxable year of the hardship distribution to the extent such -60- 64 contributions are in excess of the result of $7,000 (multiplied by the Adjustment Factor) less the amount of the contribution to his account for the taxable year of the hardship distribution. Such distribution shall be in cash from the account of the Trust Participant in either the Stock and Bond Investment Account or the Bond Investment Account in the Trust Fund, or both. In making a distribution under this Section, the Committee shall follow uniform and nondiscriminatory standards and its decision shall be final. 10.02 DISTRIBUTION ON TERMINATION OF EMPLOYMENT OTHER THAN DUE TO DEATH. (a) If the employment of a Trust Participant with the Association and all Related Companies shall terminate for any reason, including retirement under the Retirement Plan for Salaried Employees of First Federal of Michigan, but excepting death, the Net Trust Account Interest of such Trust Participant, if it does not then exceed, and at the time of any prior distribution did not exceed, $3,500 ($1,750 prior to January 1, 1985), or if the Participant elects in writing to receive an immediate distribution of his interest, shall be distributed to him or for his benefit in a cash lump sum promptly after determination of such Net Trust Account Interest; otherwise distribution of his Net Trust Account Interest (subject to continuing adjustment of his interest in the Stock and Bond Investment Account and the Bond Investment Account, respectively, for change, improvement or impairment) shall be deferred until the -61- 65 end of the Fiscal Year coinciding with or immediately following his attainment of age 65 or his death, if earlier, subject to the limits in Section 10.06 hereof. An election of a Participant to receive an immediate distribution of his interest shall be obtained in writing within the 90-day period preceding the date benefit payments begin. The Committee shall notify the Participant of the deferral of his distribution to his Normal Retirement Age in the absence of an election. Such notification shall include a general description of the material features, and an explanation of the relative values of and the forms of payment available under the Plan in a manner that would satisfy the notice requirements of Code Section 417(a)(3), and shall be provided no less than 30 days and no more than 90 days prior to the date benefit payments begin. The consent of the Participant shall not be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. (b) Anything herein to the contrary notwithstanding, if such Trust Participant shall at any time on or before December 31, 1988 and prior to or after his termination of employment, have waived any and all right to such lump-sum distribution and requested distribution in installments, the Committee may instruct the Trustee to distribute a part only of the Net Trust Account Interest of the Trust Participant from the Trust Fund, and the balance of such Net Trust Account Interest (subject to continuing adjustment of his interest in the Stock and -62- 66 Bond Investment Account and the Bond Investment Account, respectively, for change, improvement or impairment) shall be distributed to or for his benefit in such additional installments, in cash or, if so directed by the Committee, in kind, over such period certain, as the Committee shall determine and instruct the Trustee, subject to the limitations set forth in Section 10.06 hereof. If at the time installment payments commence, the Trust Participant shall have an interest in both the Stock and Bond Investment Account and Bond Investment Account, each distribution shall be made on a pro rata basis from each such Account based upon his balances in each such Account as of the Year-end valuation date immediately preceding the installment distribution. (c) Unless a Trust Participant otherwise elects in writing, (and if the election occurs prior to January 1, 1989, the Committee approves such election), the payment of his Net Trust Account Interest shall commence not later than 60 days after the latest of the close of the Fiscal Year in which the Participant attains age 65, retires or otherwise terminates service for the Association and all Related Companies. (d) A Participant's interest in his Account balance shall at all times be fully vested and nonforfeitable. 10.03 DISTRIBUTION UPON DEATH. (a) In the event of the death of any Trust Participant after December 31, 1984, the Trustees shall pay over and distribute the Net Trust Account Interest of such deceased -63- 67 Participant to his Surviving Spouse, or to his designated Beneficiary, if there is no such Surviving Spouse, or if such Spouse consents to distribution to such Beneficiary in a manner conforming to a Qualified Election, in a lump sum (or if such distribution commences prior to January 1, 1989, in such amounts or installments and over such period certain, as determined by the Committee), commencing within 60 days following the end of the Plan Year in which occurred the Participant's death, subject to the limitations in Section 10.06 hereof. (b) If a Trust Participant shall die prior to January 1, 1985, and he has at such time an undistributed interest in the Trust Fund, the Net Trust Account Interest of such Trust Participant shall be distributed to the designated Beneficiary of the Trust Participant, or, in the absence of designation or if the last designated Beneficiary shall have predeceased the Trust Participant, to the Trust Participant's estate. Distribution shall be made promptly after determination of such Participant's interest, in a cash lump sum, or in kind if the Committee shall so determine, unless the Trust Participant shall have elected, in the manner set forth in Section 10.06 hereof, distribution by installments, in which event the Committee shall instruct the Trustee to distribute only a part of the Net Trust Account Interest of the Trust Participant from the Trust Fund and the balance of such Net Trust Account Interest (subject to continuing adjustment for Fund change, improvement or impairment) shall be distributed to or for the benefit of such Beneficiary in such amounts or installments, in cash, or if so directed by the -64- 68 Committee, in kind, over such period certain, but not exceeding 15 years, as the Trust Participant shall have selected. If at the time the installment payments commence, the Beneficiary shall have an interest in both the Stock and Bond Investment Account and Bond Investment Account, each distribution shall be made on a pro rata basis from each such Account based upon his balances in each such Account as of the Year-end valuation date immediately preceding the installment distribution. (c) For purposes of Article X, the following shall apply: (1) QUALIFIED ELECTION. An election by the Trust Participant which designated a person other than his Spouse as Beneficiary will not be effective after December 31, 1984 unless the Plan has received a waiver of such Spouse's rights as Beneficiary hereunder. The waiver must satisfy the following requirements: (A) the waiver must be in writing; (B) the Participant's Spouse must consent to the waiver in writing; (C) the waiver must designate a beneficiary (or a form of benefits) which may not be changed without the Spouse's consent (unless the Spouse's consent expressly permits designations by the employee without any requirement of further Spousal consent); (D) the Spouse' consent must acknowledge the effect of the election and be witnessed by a notary public. Notwithstanding this consent requirement, if the Trust Participant establishes to the satisfaction of a Plan representative that such written consent may not be obtained because there is no Spouse or the Spouse cannot be located, an election will be deemed a Qualified Election. The Employee shall only be deemed to establish to the satisfaction of the Committee that such written consent may not be obtained because the spouse cannot be located by signing an affidavit to such effect witnessed by a notary public. Any consent obtained under this provision (or establishment that the Spouse's consent may not be obtained) will be valid only (A) with respect to the Spouse who signs the consent, or in the event of a deemed Qualified Election, the designated Spouse; and (B) with respect to the manner of benefit payment consented to by the Spouse. A subsequent Spouse shall not be bound by the consent of a prior Spouse. A consent that permits designations by the -65- 69 Participant without any requirement of further consent by such Spouse must acknowledge that the Spouse has the right to limit consent to a specific Beneficiary, and a specific form of benefit where applicable, and that the Spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. A Spouse's consent shall be revocable by the Spouse unless otherwise set forth in the consent. The Plan shall be fully protected in relying upon a notarized statement from the Participant to the effect that he has no Spouse or upon a notarized consent by the purported Spouse of the Participant and shall have no liability to any Spouse for any payments made to the Participant in reliance upon such notarized statement or consent. For purposes of this Section 10.03(c), the term Spouse or Surviving Spouse under this provision shall mean the present Spouse or a former Spouse of the Participant who will be treated as the Spouse or Surviving Spouse to the extent provided under a qualified domestic relations order as described in Section 414(p) of the Code. 10.04 DESIGNATION OF BENEFICIARY. Each Trust Participant may, by written notice filed with the Committee, in such form as it shall prescribe, designate a Beneficiary to receive any benefit to which such Trust Participant may be entitled hereunder in the event of the death of the Trust Participant prior to the complete distribution of his interest in the Trust Fund. Any such designations shall be held on file by the Committee, and may be changed at any time by similar notice to the Committee. If after December 31, 1984, any Participant shall have failed to designate a Beneficiary, at the time of the death of the Participant the Committee shall pay any or all amounts held under this Trust for such Participant at the time of his death to the following in the order named: -66- 70 (a) such Participant's then living widow or widower; (b) such Participant's then living children and issue of any deceased children in equal shares by right of representation; (c) such Participant's then living father and mother equally or to the survivor; (d) such Participant's then living brothers and sisters equally; (e) such Participant's then living nephews and nieces equally; (f) the estate of the Participant. Prior to December 31, 1984, such amounts shall be distributed to the Participant's estate if he shall have failed to designate a Beneficiary. 10.05 SUSPENSION. Any person who continues in the service of the Association, or of a Related Company, and who shall have become a Trust Participant under this Agreement, but whose status as an Employee shall have terminated, shall have his eligibility to receive allocations of Association contributions suspended for the period of such ineligibility (but shall be entitled to adjustment of his interest in the Stock and Bond Investment Account and the Bond Investment Account, respectively, for change, improvement or impairment) until such time as he becomes entitled, under the provisions of Section 10.01, or by termination of employment, to a distribution from his Account in -67- 71 the Trust Fund, or until he shall return to eligible status as an Employee. 10.06 LIMITATIONS ON DISTRIBUTIONS. (a) GENERAL. For Plan Years beginning on or after January 1, 1989, whenever any Participant or Beneficiary of a deceased Participant shall become entitled to receive a distribution under Sections 10.02, 10.03 or 10.06(b) hereof, such distribution shall be paid in a lump sum. In the case of any Participant who retired, became disabled, died or otherwise incurred a Separation from Employment prior to January 1, 1989, the terms and provisions of the Plan relating to payment of benefits in the form of either a lump sum or installments, subject to Committee consent as in effect prior to January 1, 1987 shall continue to apply until January 1, 1989. (b) DISTRIBUTION REQUIREMENTS. The following shall apply to any distribution of a Participant's interest and shall take precedence over any inconsistent provisions of this Plan: (1) GENERAL. All distributions under this Section 10.06 shall be determined and made in accordance with the Income Tax Regulations under Section 401(a)(9), including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the Regulations. (2) REQUIRED BEGINNING DATE. The entire interest of a Participant must be distributed no later than the Participant's required beginning date. The required beginning date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70-1/2; provided, however, that if the Participant attains age 70-1/2 -68- 72 before January 1, 1988, his required beginning date shall be determined in accordance with (A) or (B) below: (A) NON-5% OWNERS. The required beginning date of a Participant who is not a 5% owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age 70-1/2 occurs. (B) 5% OWNERS. The required beginning date of a Participant who is a 5% owner during any year beginning after December 31, 1979, is the first day of April following the later of: (i) the calendar year in which the Participant attains age 70-1/2, or (ii) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a 5% owner, or the calendar year in which the Participant retires. The required beginning date of a Participant who is not a 5% owner who attains age 70-1/2 during 1988 and who has not retired as of January 1, 1989, is April 1, 1990. A Participant is treated as a 5% owner for purposes of this Section if such Participant is a 5% owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 but without regard to whether the Plan is Top Heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66-1/2 or any subsequent Plan Year. Once distributions have begun to a 5% owner under this Section, they must continue to be distributed, even if the Participant ceases to be a 5% owner in a subsequent year. (3) TRANSITIONAL RULE. The limitations contained in this Section 10.06(b) shall not apply to any distributions made under a designation of a method of distribution; provided: (A) The distribution by the trust is one which would not have disqualified such trust under Section 401(a)(9) of the Code as in effect prior to amendment by the Deficit Reduction Act of 1984. -69- 73 (B) The distribution is in accordance with a method of distribution designated by the Participant whose interest in the trust is being distributed or, if the Participant is deceased, by a Beneficiary of such Participant. (C) Such designation was in writing, was signed by the Participant or the Beneficiary, and was made before January 1, 1984. (D) The Participant had accrued a benefit under the Plan as of December 31, 1983. (E) The method of distribution designated by the Participant or the Beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Participant's death, the Beneficiaries of the Participant listed in order of priority. (F) If a designation is revoked, any subsequent distribution must satisfy the requirements of Section 401(a)(9) of the Code and the regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the trust must distribute, by the end of the calendar year following the calendar year in which the revocation occurs, the total amount not yet distributed which would have been required to have been distributed to satisfy Section 401(a)(9) of the Code and the regulations thereunder, but for the election made prior to January 1, 1984. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in Section 1.401(a)(9)-2 of Regulations under the Code. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). In the case in which an amount is transferred or rolled over from 1 plan to another plan, the rules in Q&A J-2 and Q&A J-3 of Section 1.401(a)(9)-1 of such Regulations shall apply. -70- 74 (c) SPECIAL RULES. In no event shall this Plan accept any direct or indirect transfer of assets of a defined benefit plan, money purchase pension plan (including a target benefit plan), stock bonus, or other profit-sharing plan which would otherwise provide for a life annuity form of payment to the Trust Participant, without prior amendment of this Plan to provide for a Qualified Joint and Survivor Annuity within the meaning of Code Sections 401(a)(11) and 417. 10.07 QUALIFIED DOMESTIC RELATIONS ORDERS. If the Plan shall receive a domestic relations order, the following shall apply: (a) The Committee shall promptly notify the Trust Participant and each Alternate Payee (as hereinafter defined) of the Plan's receipt of such order, the provisions of this Section, and any other Plan procedures for determining the qualified status of such order under the Act. (b) Within a reasonable time after receipt of such order, the Committee shall request the Trust Participant and each Alternate Payee to notify the Plan whether they consent to or contest the validity of such order under the Act. (c) Thereafter, within a reasonable period of time after such persons have had an opportunity to consent to or contest the domestic relations order, including indicating, where appropriate, the reasons for their position, the Committee shall make a determination of whether such order is a "Qualified -71- 75 Domestic Relations Order" (as hereinafter defined) and notify the Trust Participant and each Alternate Payee of such determination. In making such determination, the Committee may apply to a court of competent jurisdiction for its determination. (d) During any period in which the issue of whether a domestic relations order is a Qualified Domestic Relations Order is being determined (by the Committee, by a court of competent jurisdiction, or otherwise), the Committee shall separately account for the amounts which would have been payable to the Alternate Payee during such period if the order had been determined to be a Qualified Domestic Relations Order. Thereafter, the following shall apply: (1) If within 18 months beginning with the date on which the first payment would be required to be made under the Qualified Domestic Relations Order, the order (or modification thereof) is determined to be a Qualified Domestic Relations Order, the Committee shall pay the segregated amounts (plus any interest thereon, if applicable) to the person or persons entitled thereto. (2) If within 18 months beginning with the date on which the first payment would be required to be made under the Qualified Domestic Relations Order it is determined that the order is not a Qualified Domestic Relations Order, or the issue as to whether the order is a Qualified Domestic Relations Order is not resolved, then the Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. If the determination is made after the close of the 18-month period that the order is a Qualified Domestic Relations Order, such order shall be applied prospectively only. (e) To the extent that the Plan and any fiduciary under the Plan acts in accordance with the provisions of this Section in treating a domestic relations order as being (or not -72- 76 being) a Qualified Domestic Relations Order, or in taking action under paragraph (d), the Plan's obligation to the Trust Participant and to each of his Alternate Payees hereunder shall be discharged to the extent of any payment made pursuant hereto. (f) Upon written request by an Alternate Payee, the Committee shall pay the Alternate Payee all or a portion of the benefits to which he is entitled under a Qualified Domestic Relations Order unless the Order provides otherwise. (g) For purposes hereof, the following terms have the following meanings: (1) "Qualified Domestic Relations Order" means a domestic relations order that qualifies under Section 206(d) of the Act. (2) "Alternate Payee" means any spouse, former spouse, child or other dependent of a Trust Participant who is recognized by a domestic relations order as having a right to receive all or a portion of the benefits payable under the Plan with respect to the Trust Participant. 10.08 UNCLAIMED BENEFITS. If at, after, or during the time when a benefit hereunder is payable to any Participant, Beneficiary or other distributee, the Committee or the Trustee shall mail by registered or certified mail to such Participant, Beneficiary or other distributee at his last known address a written demand for his then address, and if such Participant, Beneficiary or distributee shall fail to furnish the same to the Trustee within 4 years from the mailing of such demand, then such Participant, Beneficiary or other distributee shall forfeit his right to such benefit and such benefit shall reduce the amount of -73- 77 the Association's contribution for the Plan Year in which such 4-year period expires. Such forfeited benefit shall be reinstated if a claim for the same is made by the Participant, Beneficiary, or other distributee at any time thereafter by a contribution to the Plan by the Association in the amount forfeited. 10.09 ELIGIBLE ROLLOVER DISTRIBUTIONS. (a) This Section 10.09 applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section 10.09, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. (b) An "Eligible Rollover Distribution" is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include any distribution that is 1 of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of 10 years or more, any distribution to the extent such distribution is required under Section 401(a)(9) of the Code, and the portion of any distribution that is not includible in gross income (determined without regard to the -74- 78 exclusion for net unrealized appreciation with respect to employer securities). (c) An "Eligible Retirement Plan" is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (d) A "Distributee" includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the Alternate Payee under a Qualified Domestic Relations Order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the spouse or former spouse. (e) A "Direct Rollover" is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. -75- 79 ARTICLE XI TOP HEAVY PROVISIONS If in any Plan Year beginning on or after January 1, 1984, the Plan is determined to be a Top Heavy Plan under Section 416 of the Code, the following provisions shall, to the extent required by said Section 416, become effective for such Plan Year and shall supersede any other provisions of the Plan which otherwise would apply for that Plan Year. 11.01 MINIMUM CONTRIBUTIONS. At any time this Plan is a Top Heavy Plan, the Association shall make a minimum contribution for each Participant who is not a Key Employee under the Plan for the Plan Year as follows: (a) The amount of the minimum contribution shall be the lesser of the following percentages of Compensation: (1) 3% of such Participant's Compensation; or (2) The highest percentage at which such contributions are made under the Plan for the Plan Year on behalf of a Key Employee. (A) For purposes of paragraph (2), all defined contribution plans required to be included in an Aggregation Group shall be treated as one plan. (B) Paragraph (2) shall not apply if the Plan is required to be included in an Aggregation Group and the Plan enables a defined benefit plan required to be included in the Aggregation Group to meet the requirements of Sections 401(a)(4) or 410 of the Code. -76- 80 In determining whether the minimum contribution is made under this Section 11.01(a), (i) for Plan Years prior to January 1, 1989, contributions to the Plan which are allocated to a Participant under Article VI shall reduce the amount of the minimum contribution required to be made to the Participant's Account for the Plan Year and (ii) for Plan Years subsequent to December 31, 1988, contributions to the Plan which are allocated to a Participant under Article VI shall not be taken into account. (b) There shall be disregarded for purposes of this Section 11.01 any contributions or benefits under Chapter 21 of the Code (relating to the Federal Insurance Contributions Act), Title II of the Social Security Act, or any other Federal or State law. (c) For purposes of this Section 11.01, the term "Participant" shall be deemed to refer to all Participants who have not separated from service at the end of the Plan Year, including, without limitation, individuals who declined to elect or make contributions to the Plan. Individuals who have (1) failed to complete 1,000 Hours of Service (or the equivalent), (2) declined to make mandatory contributions into the Plan, or (3) been excluded from the Plan because such individual's compensation is less than a stated amount but must be considered Participants to satisfy the coverage requirements of Section 410(b) of the Code in accordance with Section 401(a)(5) of the Code, are considered Participants covered by the Plan for purposes of the minimums referred to in this Section 11.01. -77- 81 (d) Anything to the contrary in this Plan notwithstanding, if at any time when this Plan is a Top Heavy Plan, the Association also maintains a Top Heavy defined benefit plan and the defined benefit minimum referred to in Section 416(c)(1) of the Code is provided in the Top Heavy defined benefit plan (offset by benefits provided by this Plan, if applicable), then this Section 11.01 shall not apply to this Plan. 11.02 IMPACT UPON MAXIMUM CONTRIBUTIONS AND BENEFITS. For any Plan Year in which the Plan is a Top Heavy Plan or is a Super Top Heavy Plan, Article V, Section 5.03, shall be read by substituting "1.0" for "1.25" wherever it appears therein. 11.03 TOP HEAVY AND SUPER TOP HEAVY PLAN DEFINED. (a) The Plan shall be deemed to be a "Top Heavy Plan" based upon the following: (1) GENERAL. This Plan shall be deemed to be a Top Heavy Plan with respect to any Plan Year, if (A) as of the Determination Date (as defined in paragraph (3)(D) hereof), the Plan is not required to be included in an Aggregation Group with other plans and the present value of the cumulative accounts under the Plan when considered by itself for Key Employees exceeds 60% of the present value of the cumulative accounts under the Plan for all Participants and the Plan is not included in a permissive Aggregation Group that is not a Top Heavy Group, or (B) the Plan is required to be included in an Aggregation Group (as defined in paragraph (2)(A) below), and such group, after considering any permissible Aggregation under paragraph (2)(A) below, is a Top Heavy Group (as defined in paragraph (2)(B) below). For purposes hereof, in computing the present value of cumulative accounts for periods prior to January 1, 1985, amounts attributable to deferral elections by Participants under Article VI shall be excluded. (2) AGGREGATION. For purposes of this paragraph (a): -78- 82 (A) AGGREGATION GROUP. (i) REQUIRED AGGREGATION. The term "Aggregation Group" means: (I) Each plan (including plans terminated within the 5-year period ending on the Determination Date) of the Association in which a Key Employee is a participant, and (II) Each other plan of the Association which enables any plan described in (I) to meet the requirements of Section 401(a)(4) or 410 of the Code. (ii) PERMISSIBLE AGGREGATION. The Association may treat any plan not required to be included in an Aggregation Group under subparagraph (i) as being part of such group, if such group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code with such plan being taken into account. (B) TOP HEAVY GROUP. The term "Top Heavy Group" means any Aggregation Group if: (i) The sum (as of the Determination Date) of: (I) The present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in such group, and (II) The aggregate of the accounts of Key Employees under all defined contribution plans included in such group, (ii) Exceeds 60% of a similar sum determined for all Trust Participants. (3) SPECIAL RULES. (A) DISTRIBUTIONS DURING LAST 5 YEARS. For purposes of this paragraph (a), in determining the present value of the cumulative aggregate benefit for any Trust Participant, or the amount of any Account of any Trust Participant, such present value or amount shall be increased by the aggregate distributions made with respect to such -79- 83 Trust Participant under the Plan during the 5-year period ending on the Determination Date. (B) ROLLOVER CONTRIBUTIONS. Except to the extent provided in Regulations issued pursuant to Code Section 416, any Rollover Contributions (or similar transfer) initiated by the Trust Participant and made after December 31, 1983, to the Plan shall not be taken into account with respect to the transferee plan for purposes of determining whether such plan is a Top Heavy Plan (or whether any Aggregation Group which includes such plan is a Top Heavy Group). (C) TRUST PARTICIPANTS WHO DO NOT PERFORM AN HOUR OF SERVICE. Effective for Plan Years beginning after December 31, 1984, if any Trust Participant has not performed an Hour of Service during the 5-year period ending on the Determination Date, any accrued benefit for such Trust Participant and the Account of such Trust Participant shall not be taken into account. (D) DETERMINATION DATE. The Determination Date is the last day of the preceding Plan Year, except that in the case of the first Plan Year of any plan, it shall be the last day of such Plan Year. If more than 1 plan is aggregated, the present value of accrued benefits and accounts shall be determined separately under each plan as of each plan's Determination Date and the plans shall then be aggregated by adding the results of each plan as of the Determination Dates for such plans that fall within the same calendar year. (E) DEFINED BENEFIT PLANS. In determining the present value of accrued benefits for all defined benefit plans, the accrued benefit for each current participant shall be computed as if the participant voluntarily terminated service as of the most recent Valuation Date which is within a 12-month period ending on the Determination Date. For purposes hereof: (i) In the first Plan Year of any plan, the accrued benefit for a current participant shall be determined as if the participant terminated service as of the Determination Date (the last day of the Plan Year) and for any subsequent year the accrued benefit for such participant shall be determined as if the individual terminated service as of the most recent Valuation Date -80- 84 which is within a 12-month period ending on the Determination Date. (ii) The Valuation Date shall be the same Valuation Date as used in computing plan costs for minimum funding requirements, regardless of whether a valuation is performed for the year. (iii) The actuarial assumptions set forth in the plan for purposes of Section 416 of the Code shall apply. (iv) The present value shall be determined based upon a benefit payable commencing at Normal Retirement Age (or attained age, if later). (v) Subsidized early retirement benefits and subsidized benefit reductions shall not be taken into account unless they are non-proportional subsidies. (vi) Solely for the purpose of determining if the Plan, or any other plan included in a required Aggregation Group of which this Plan is a part, is Top Heavy (within the meaning of Section 416(g) of the Code) the accrued benefit of an Employee other than a Key Employee (within the meaning of Section 416(i)(1) of the Code) shall be determined under (I) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Association and Related Companies, or (II) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the Code. (F) DEFINED CONTRIBUTION PLANS. In a defined contribution plan, the present value of accrued benefits as of the Determination Date for any individual is the sum of: (i) The account balance of the individual as of the most recent Valuation Date occurring within a 12-month period ending on the Determination Date, and (ii) An adjustment for contributions due as of the Determination Date. -81- 85 In the case of a plan not subject to the minimum funding requirements of Section 412 of the Code, the adjustment in (ii) is generally the amount of any contributions actually made after the Valuation Date, but on or before the Determination Date; provided, however, that in the first Plan Year of the Plan, such adjustment shall also reflect the amount of any contributions made after the Determination Date that are allocated as of a date in that first Plan Year. If the plan is subject to said minimum funding requirements, the account balance in (i) shall include contributions that would be allocated as of a date not later than the Determination Date, even though those amounts are not yet required to be contributed, such as contributions waived in prior years and contributions not paid that result in a funding deficiency. In addition, an adjustment shall be made to (ii) to reflect the amount of any contribution actually made (or due to be made) after the Valuation Date, but before the expiration of the extended payment period permitted by Code Section 412(c)(10). For purposes of this paragraph (F) the "Valuation Date" shall be (i) the same Valuation Date as used in computing plan costs for minimum funding purposes, if the plan is subject to said minimum funding requirements, or (ii) if the plan is not subject to minimum funding requirements, the date established by the plan for valuing and adjusting all account balances. (G) PARTICIPANTS WHO CEASE TO BE KEY EMPLOYEES. If any Participant is a Non-Key Employee with respect to any Plan for any Plan Year, but he was a Key Employee with respect to such Plan for any prior Plan Year, any accrued benefit for such Participant and the Account of such Participant shall not be taken into account. (H) ACCRUED BENEFIT. Solely for the purpose of determining if the Plan, or any other plan included in a required Aggregation Group of which this Plan is a part, is Top Heavy (within the meaning of Section 416(g) of the Code) the accrued benefit of an Employee other than a Key Employee (within the meaning of Section 416(i)(1) of the Code) shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Association and Related Companies, or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual -82- 86 rate permitted under the fractional accrual rate of Section 411(b)(1)(C) of the Code. (b) The Plan shall be a Super Top Heavy Plan if it would be a Top Heavy Plan under the provisions of Section 11.03(a), but substituting "90%" for "60%" in the ratio test in Section 11.03(a)(1) and (2). ARTICLE XII SPENDTHRIFT PROVISIONS Neither the principal of the Trust Fund nor any of the income therefrom, nor interest in the Trust whatsoever, shall be subject to any conveyance, transfer or assignment by any Trust Participant or Beneficiary, nor shall the same be pledged as collateral security for any debt of any Trust Participant or Beneficiary, nor shall the same be subject to any claim of any creditor of any Trust Participant or Beneficiary through legal process or otherwise, or to any domestic relations order, unless such an order is determined pursuant to Section 10.07 hereof, to be a Qualified Domestic Relations Order, as defined in Section 414(p) of the Code, or any domestic relations order entered before January 1, 1985. If under any such order, payment is required to be made to an Alternate Payee within the meaning of Section 206(d)(3)(D) of the Act, the interest rate assumption used in determining the present value of any benefit shall be the interest rate used (as of the date of determination) by the Pension Benefit Guaranty Corporation for purposes of determining the present value of a lump sum distribution on Plan termination. It is the -83- 87 intention to place the absolute title to all properties which shall constitute the assets of the Trust in the Trustee, with power to pay out the same and distribute the Trust assets only as provided by this Agreement. Any attempted sale, conveyance, assignment or pledge of any of the funds or properties held in Trust, or any part thereof, or any income from the Trust, other than pursuant to a Qualified Domestic Relations Order, by any Trust Participant or Beneficiary shall be null and void, and shall not be recognized by the Trustee. No Trust Participant or Beneficiary shall be deemed to have any fully vested interest in the Trust or in the Trust Fund until he shall have become entitled to payment or until the Trust shall be terminated. ARTICLE XIII RIGHTS OF PARTICIPANTS AND THE ASSOCIATION Neither the establishment of this Plan, nor any provisions of this Agreement or modifications thereof, nor the granting of any benefits, nor the creation of any fund or account, nor the acquisition of any property by the Trustee, shall be held or construed as creating any contract, or as giving any Employee, Participant, Trust Participant or Beneficiary, or any person whomsoever, any legal or equitable rights against the Association, the Trustee, or the Committee, except as may be specifically provided in this Agreement or conferred by affirmative action of the Association or the Committee in accordance with the terms of this Agreement, nor shall it be held or construed as giving any Employee, Participant, or other officer or employee of the -84- 88 Association the right to be retained in the service of the Association, and the Association expressly reserves its right to discharge without liability, other than for salary or wages due and unpaid, any employee or employees whenever the interests of the Association may in its sole discretion so require. ARTICLE XIV THE TRUSTEE 14.01 The Trustee shall administer the Trust Fund under the Plan: (a) solely in the interest of the Participants and Beneficiaries under the Plan and for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying the reasonable expenses of administering the Plan; (b) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (c) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances, it is not prudent to do so; provided, however, that the aforesaid diversification requirement and prudence requirement (only to the extent that it requires diversification) shall not be regarded as violated by the -85- 89 acquisition or holding of "qualifying employer real property" or "qualifying employer securities" as those phrases are used in Section 404(a)(2) of the Act if and to the extent permitted under Section 408(e) of the Act. Subject to the foregoing, the Trustee shall have power, in its uncontrolled discretion and judgment, to invest and reinvest in any securities or other properties which are legal investments for Trustees in the State of Michigan and which are not prohibited by the Act. Notwithstanding any other provision of this instrument, the Trustee, upon written instruction by the Board of Directors of First Federal of Michigan, shall cause the Trust Fund to be invested and reinvested based upon the percentages of fixed income securities and equity securities specified by such Board of Directors and in such event the Trustee shall be in no way and to no extent liable for any loss or losses which may directly or indirectly result from the Board of Directors' exercise of its power to specify such percentages, to the extent so exercised. Notwithstanding any provisions of Section 14.01 of this Plan to the contrary, except Section 14.01(a), (b) and (c), with respect to the Bond Investment Account of the Trust Fund, investments shall be made primarily in securities of the United States of America and, the Trustee may cause any part or all of the money of the Bond Investment Account to be commingled with the money of employee benefit trusts created by others which are qualified under the Code, as now or hereafter amended, or may -86- 90 cause such money to be invested as a part of the NBD Bank Treasury Investment Fund, and money of this Trust so added to any such trust or Fund at any time shall be subject to all of the provisions of such Trust or Fund as it is amended from time to time. 14.02 The Trustee's fees for administering the Trust shall be such as may be mutually agreed upon in writing between the Association and the Trustee, and the Association agrees to pay the same. In the event the Association shall not pay them, the Trustee shall have a lien therefor, and may deduct such fees, together with any and all necessary expenses incurred by the Trustee in the administration of the Trust, from the Trust Fund. 14.03 The Trustee shall take, hold, manage, sell, exchange, pledge, transfer, and otherwise deal with and dispose of the Trust property and shall exercise the powers herein conferred upon it in accordance with this Agreement. The Trustee shall invest and reinvest the principal and income of the Trust Fund as provided in Section 14.01, but may maintain such portions of the Stock and Bond Investment Account and the Bond Investment Account of the Trust Fund in cash, without liability for interest thereon, as it shall deem advisable. 14.04 To the extent permitted by the Act, the Trustee shall have the power but shall not be obligated to make advances to or for the benefit of the Trust Fund, and to borrow money on its behalf (but not from the Association), for the protection or preservation of the Trust or to carry out the purposes of the -87- 91 Trust; and for the repayment of all such advances and borrowings, with interest at rates generally prevailing for like loans, it may give to the lender a lien upon any and all funds or other property at any time in the Trust. The Trustee shall not, however, make any distribution, payment, loan, or advance to any Trust Participant or Beneficiary except as specifically authorized or permitted by this Agreement. 14.05 The Trustee shall have the right, subject to the approval of the Committee, to employ agents, and counsel, who may be of counsel for the Association, and to pay their reasonable compensation and expenses, and the Trustee, to the extent permitted by the Act, shall not be liable for any neglect, omission, or wrongdoing of any such agent or counsel, providing that reasonable care shall have been exercised in their selection. 14.06 The Trustee may register, or may hold in bearer form, title to stocks, bonds, or other securities or other property in the Trust either in its own name or in the name of its nominee, and with or without designation of fiduciary capacity, and the Trustee shall be liable for any loss which, but for the exercise of the authority so given, would not have occurred. 14.07 The Trustee shall have authority to execute and deliver proxies, powers of attorney, agreements, and such other documents as it may deem necessary or advisable, in administering the Trust. -88- 92 14.08 The Trustee shall have the power to determine whether money and property coming into its hands hereunder shall be treated as principal or income, and to apportion expenses, gains or losses to principal or income. 14.09 In addition to the powers and authority specifically enumerated herein, the Trustee shall have such other powers and authority as it may deem necessary for full and complete management of the Trust and to carry out the purposes of the Trust. Should it become necessary to perform any act in administering the Trust and there is neither direction in this Agreement nor direction of the Committee on file with the Trustee and no such direction can be obtained after reasonable inquiry, the Trustee shall have full power and discretion to act and in so acting shall be fully protected and absolved from all liability except as provided by the Act. 14.10 The acts of the Trustee hereunder shall be binding and conclusive on everyone with whom it deals, and no one not a party hereto or a Participant or Beneficiary hereunder shall be required to take cognizance of the provisions of this Agreement, nor be permitted to question the authority of the Trustee in the premises, nor be required or permitted to inquire as to the disposition or application of any moneys paid to the Trustee. 14.11 The Trustee shall keep and maintain such accounts and records of the Trust and shall make such periodic reports to the Committee as it shall deem necessary and proper or as the Committee may require. Copies of such reports shall be delivered -89- 93 by the Trustee to the Association. Reports and accounts of the Trustee may be settled by correspondence or other agreement between the Association and the Trustee and any such settlement agreement shall be considered final and binding upon the Association, the Trustee, Employees, Trust Participants and their Beneficiaries. 14.12 The Trustee is a party to this Agreement solely for the purposes set forth in this Agreement and to perform the acts set forth in this Agreement, and no obligation or duty shall be expected or required of it except as expressly stated herein. Except as provided by the Act, the Trustee shall not, in any event, be liable to any person for any action taken or for any failure to act if such action or non-action is in accordance with the written direction, authorization, instruction or certification of the Committee. 14.13 The Association may remove the Trustee by written notice of such removal mailed to the Trustee at its last known address as shown by the records of the Committee, or by delivering written notice to the Trustee. Such removal shall take effect in not less than 30 days nor more than 60 days following the date of mailing or delivery of such notice and upon the acceptance of the Trust by a Successor Trustee. The Trustee may resign upon giving like notice. 14.14 In no event shall such resignation or removal terminate this Trust, but the Association shall have the duty of forthwith appointing a Successor Trustee who or which will agree -90- 94 to carry out the terms of this Trust. In the case of the resignation or removal of the Trustee, the Trustee shall forthwith assign, transfer, and deliver to the Successor Trustee all funds, property, and books of account (or copies thereof) in its possession under this Agreement, provided that the Trustee shall have a lien on the Trust Fund for all fees and expenses chargeable to the Trust Fund until paid. ARTICLE XV AMENDMENTS 15.01 The Association reserves the right to amend this Agreement at any time and from time to time, and all parties to this Agreement or claiming any interest thereunder shall be bound thereby; provided, however, that no Trust Participant, or other person having an already accrued interest in the Trust, shall, without his consent, be deprived of any interest in the Trust already existing, or have any such interest adversely affected, or have an "optional form of benefit" eliminated within the meaning of Section 204(g)(2) of ERISA, except to the extent, if any, required to permit the Trust to qualify or to maintain its qualification as a tax exempt employees' trust under the Code, the Act, or any other present or future laws or regulations, federal or state, pertaining to such trusts, nor shall any amendment change the duties, powers, compensation or liability of the Trustee without its written consent thereto. In no event shall any amendment have the effect of vesting in or reverting to the Association any right, title or interest in or to any property or -91- 95 funds held by the Trustee under this Agreement. The decision of the Committee shall be binding upon the Participants, Beneficiaries and all other persons and parties interested as to whether or not any amendment does deprive a Participant or any other person or party of any interest already existing or adversely affects such interest. Any such amendment or termination shall be effective when signed by the President (or Vice President) and Secretary (or Treasurer) of the Association and filed with the Trustee. The consent of the Trustee shall not be necessary unless in its discretion its duties or liabilities have been increased. No amendment shall reduce the vested percentage of any Participant. Further, if the Plan's vesting schedule is amended in any way that directly or indirectly affects the computation of the Participant's vested percentage or if the Plan is deemed amended by an automatic change to or from a Top Heavy vesting schedule, each Participant with 3 (5 for Participants who do not have at least 1 Hour of Service on or after January 1, 1989) or more Years of Service is permitted to elect to have his vested percentage computed without regard to such amendment. The period during which the election may be made shall commence on the date the amendment is adopted and shall end as of the later of: (a) 60 days after the amendment is adopted; (b) 60 days after the amendment becomes effective; or -92- 96 (c) 60 days after the Participant is issued a written notice of the amendment by the Committee. 15.02 Notwithstanding any other provision of this Agreement, in the event that the Trust under this Agreement shall fail to qualify or to maintain its qualification as a tax-exempt employees' trust under the Code, the Act or any other present or future laws or regulations, federal or state, pertaining to such trusts, the Association may continue the Plan contemplated in this Agreement as a plan for cash distribution to Participants of the entire amount of the contribution for each succeeding Fiscal Year as determined under Section 5.01, with all Participants being deemed to have failed to elect to become Trust Participants under the provisions of Section 6.02. In such event, this Agreement shall be deemed to be a declaration of an employees' benefit program as distinguished from an agreement between the Association and the Trustee, and the Trustee's function hereunder shall be deemed limited to such activity in the course of distribution of the interests of Trust Participants in the Trust Fund as shall be consistent with such change of circumstances. Anything herein to the contrary notwithstanding, Charter One shall not have authority to amend this Plan to reduce or eliminate any contribution required to be made on behalf of Plan Participants for periods prior to the Company Merger Effective Time. -93- 97 ARTICLE XVI TERMINATION AND MERGER 16.01 Although it is contemplated by the Association that this Agreement and Plan shall be permanent, it is recognized that at some future date sound and prudent business judgment may require that the Association cease payments into the Trust Fund or otherwise, and the Association, therefore, reserves the right to terminate at any time this Agreement and its obligations to make contributions hereunder. 16.02 If the Association should abandon the Plan and/or the Trust, through a complete discontinuance of contributions or otherwise, or if the Association should determine to liquidate or dissolve, or if a receiver of the Association be appointed, or if pursuant to the right of change or termination reserved to it in this Agreement, the Association should terminate or partially terminate the Trust, the Accounts of all affected present and former Participants as then appearing upon the records of the Trustee shall continue to be fixed, fully vested and nonforfeitable, and the Trustee shall determine the value of the Trust Fund hereunder in accordance with Section 7.08. The Association shall thereupon make all proper allocations of said Fund in accordance with Section 8.05, and shall determine the interest of each then Trust Participant hereunder. Thereafter, each newly determined account in said Fund shall continue to be held in the Trust Fund for distribution to the Trust Participants and/or the Beneficiaries thereof in cash or its equivalent in -94- 98 kind, in accordance with the distribution provisions of the Plan. The Trustee shall not, however, without its consent, be required to effect any distribution of such accounts until written evidence of approval by the Commissioner of Internal Revenue of such termination and distribution shall have been submitted to the Trustee. If 1 employer of the Association, as defined in Article II, ceases to be a party to this Plan, the assets of the Trust Fund allocable to the Participants of such employer shall be determined and distributed in accordance with the provisions of this Section 16.02. In all other aspects, this Plan with the remaining employer or employers, shall continue in full force and effect. Notwithstanding the above, a Participant of the terminating employer who transfers his employment within 30 days to the remaining active employer hereunder, shall remain an active Participant under the Plan and will receive no distribution in accordance with the above. 16.03 The Plan shall not be merged with or consolidated with any other plan, and shall not transfer its assets or liabilities to any other plan, unless each Participant would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefits which he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then been terminated). -95- 99 ARTICLE XVII MISCELLANEOUS 17.01 The Trustee hereby accepts this Trust and agrees to hold all the property now or hereafter constituting Trust properties hereunder, subject to all the terms and conditions of this Agreement. 17.02 All persons accepting benefits under the Plan shall be deemed to have consented to the terms of this Agreement. 17.03 The Plan and Trust described in this Agreement are embodied in their entirety in this Agreement, and the Trustee and the Committee shall not be required to make any reference to any other document or writing for the purpose of interpreting or administering this Trust and the Plan herein contained, except as to such further certifications by the Association and/or the Committee as are provided for in this Agreement. Under no circumstances or conditions whatsoever shall any funds which at any time have been contributed to the Trust, or any funds or properties at any time held by the Trustee under the Trust, or any property at any time subject to the Trust, ever inure or revert to the benefit of the Association, or to the individual benefit of any member of the Committee, except to the extent that such member of the Committee may be entitled to benefit as a Trust Participant under this Agreement. 17.04 This Agreement shall be construed, regulated and administered according to the laws of the State of Michigan. -96- 100 17.05 This Agreement shall be binding upon and applicable to the Participants, Trust Participants, Beneficiaries, their heirs, executors, administrators and assigns, and on the successors and assigns of the Association, the Committee and the Trustee. IN WITNESS WHEREOF, FIRST FEDERAL OF MICHIGAN and NBD BANK have caused these presents to be signed by their duly qualified officers and have caused their corporate seals to be affixed hereto by the proper officers respectively authorized so to do on the day and date first above written. ATTEST: FIRST FEDERAL OF MICHIGAN /s/ W. S. Fambrough By /s/ C. Gene Harling - -------------------- ----------------------- C. Gene Harling, Chairman of the Board, President and Chief Executive Officer (Corporate Seal) ATTEST: NBD BANK /s/ Steven D. Vandi Clay By /s/ ????? - ------------------------ ----------------------- (Corporate Seal) -97- EX-11 7 EXHIBIT 11 1 EXHIBIT 11 CHARTER ONE FINANCIAL, INC. COMPUTATION OF PER SHARE EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE 3 FOR THE 12 FOR THE 3 FOR THE 12 MOS. ENDED MOS. ENDED MOS. ENDED MOS. ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1995 1994 1994 ------------ ------------ ------------- ------------ Computation of Primary Earnings Per Per Share: Weighted average number of common common shares outstanding . . . 44,899,905 44,917,503 45,023,466 44,982,377 Add common stock equivalents for shares issuable under: Stock Appreciation Rights Plan(1) . - 52,799 99,138 102,786 Stock Option Plan(1) . . . . . - 888,576 466,767 855,490 ------------ ------------ ------------- ------------ Weighted average number of shares outstanding adjusted for common stock equivalents 44,899,905 45,858,878 45,589,371 45,940,653 ============ ============ ============= ============ Earnings applicable to common stock . . . . . . . . . . $ (58,430) $ 34,032 $ 28,490 $ 3,271 ============ ============ ============= ============ Primary earnings per share . . . $ (1.30) $ 0.74 $ 0.63 $ 0.07 ============ ============ ============= ============ Computation of Fully Diluted Earnings Per Share: Weighted average number of common common shares outstanding . . . 44,899,905 44,917,513 45,023,466 44,985,649 Add common stock equivalents for shares issuable under: Stock Appreciation Rights Plan(2) . . . . . . . . . . . - 60,631 99,138 107,106 Stock Option Plan(2) . . . . . - 1,154,330 766,797 863,855 ------------ ------------ ------------- ------------ Weighted average number of shares outstanding adjusted for common stock equivalents 44,899,905 46,132,474 45,889,401 45,956,610 ============ ============ ============= ============ Earnings applicable to common stock . . . . . . . . . . $ (58,430) $ 34,032 $ 28,490 $ 3,271 ============ ============ ============= ============ Fully diluted earnings per share $ (1.30) $ 0.74 $ 0.62 $ 0.07 ============ ============ ============= ============ - ---------------------- (1) Additional shares issuable were derived under the "treasury stock method" using average market price during the period. (2) Additional shares issuable were derived under the "treasury stock method" using the higher of the average market price during the period of the market price at the end of the period.
EX-21 8 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT 2 EXHIBIT 21 CHARTER ONE FINANCIAL, INC. SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1995
JURISDICTION OF PERCENT OF INCORPORATION OWNERSHIP --------------- ---------- CHARTER ONE BANK, F.S.B. . . . . . . . . . . . . . . . . . . . . . Ohio 100% SUBSIDIARIES OF CHARTER ONE BANK, F.S.B. 1215 Financial Center Associates Ltd. . . . . . . . . . . . . . . Ohio 100% First Financial Services and Development Corporation . . . . . . Ohio 100% Thriftco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . Ohio 100% ICX Corporation . . . . . . . . . . . . . . . . . . . . . . . . . Ohio 100% 1001 Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . Michigan 100% 1001 Holding, Inc. . . . . . . . . . . . . . . . . . . . . . . . Michigan 100% FirstFed of Michigan International N.V. . . . . . . . . . . . . . Michigan 100% SUBSIDIARIES OF FIRST FINANCIAL SERVICES AND DEVELOPMENT CORPORATION First Family Financial Services, Inc. dba First Data Tech . . . . Ohio 100% First Northern Insurance Agency, Inc. . . . . . . . . . . . . . . Ohio 100% Mid-Coastal Development, Inc. dba Cypress Point Associates in South Carolina . . . . . . . . . . . . . . . . . . Ohio 100% Real Estate Appraisal Services, Inc. . . . . . . . . . . . . . . Ohio 100% Servco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . Ohio 100% Charter One Investments, Inc. . . . . . . . . . . . . . . . . . . Ohio 100% GCCC, Inc. dba ACS . . . . . . . . . . . . . . . . . . . . . . . Ohio 100% Renaissance Insurance Agency, Inc. . . . . . . . . . . . . . . . Michigan 100% SUBSIDIARY OF 1001 SERVICES, INC. 1001 Realty, Inc. . . . . . . . . . . . . . . . . . . . . . . . . Michigan 100% SUBSIDIARIES OF 1001 HOLDING, INC. 1001 Insurance Agency, Inc. . . . . . . . . . . . . . . . . . . . Michigan 100% Bay Life Insurance Company, Inc. . . . . . . . . . . . . . . . . Arizona 100%
EX-23.1 9 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF DELOITTE & TOUCHE LLP 2 INDEPENDENT AUDITORS CONSENT Charter One Financial, Inc. We consent to the incorporation by reference in Registration Statements No. 33-24070, No. 33-23805, No. 33-54508, and No. 33-61273 of Charter One Financial, Inc. on Forms S-8 of our report dated January 25, 1996 (which expresses an unqualified opinion, refers to the report of other auditors on the financial statements of a company that was merged with Charter One Financial, Inc., and includes an explanatory paragraph relating to the change in method of accounting for debt and equity securities in 1994), appearing in this Annual Report on Form 10-K of Charter One Financial, Inc. for the year ended December 31, 1995. Deloitte & Touche LLP Cleveland, OH March 20, 1996 EX-23.2 10 EXHIBIT 23 1 EXHIBIT 23.2 CONSENT OF KPMG PEAT MARWICK LLP 2 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Charter One Financial, Inc. We consent to the incorporation by reference in Registration Statements No. 33-24070, No. 33-23805, No. 33-54508, and No. 33-61273 of Charter One Financial, Inc. on Forms S-8 of our report dated January 18, 1995, relating to the consolidated statement of financial condition of FirstFed Michigan Corporation and subsidiaries as of December 31, 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1994, which expresses an unqualified opinion and includes an explanatory paragraph relating to the change in method of accounting for debt and equity securities and goodwill in 1994, and the change in method of accounting for postretirement benefits other than pensions in 1993, which report appears in the December 31, 1995, Annual Report on Form 10-K of Charter One Financial, Inc. KPMG Peat Marwick LLP Detroit, MI March 19, 1996 EX-27 11 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CHARTER ONE FINANCIAL, INC. AND SUBSIDIARIES AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 163,123 0 495,248 0 1,843,016 3,879,160 3,961,326 6,743,036 64,436 13,578,859 7,012,491 848,033 260,286 4,613,651 451 0 0 843,947 13,578,859 557,936 501,910 27,564 1,087,410 346,605 769,594 317,816 1,032 (19,560) 215,743 53,205 0 0 0 34,032 .74 .74 2.24 21,174 3,042 18,835 30,000 64,838 2,318 708 64,436 64,436 0 0
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