<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission file number 0-17894
FIRSTFEDERAL FINANCIAL SERVICES CORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1622711
- --------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 EAST LIBERTY STREET, WOOSTER, OHIO 44691
- --------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 264-8001
----------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of each class: Name of each exchange on which registered:
------------------- -----------------------------------------
<S> <C>
Common Stock, par value $1.00 per share Nasdaq National Market
7% Cumulative Convertible Preferred
Stock, Series A, without par value Nasdaq National Market
6 1/2% Cumulative Convertible Preferred
Stock, Series B, without par value Nasdaq National Market
</TABLE>
Indicate by check mark whether the registrant (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
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. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the Nasdaq Stock Market as of March 4, 1997, was
$90,347,276. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of March 4, 1997, there were issued and outstanding 3,699,531 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
Part III of Form 10-K - Portions of the Proxy Statement for 1997 Annual
Meeting of Stockholders.
<PAGE> 2
ITEM 1. BUSINESS
- ----------------
GENERAL
- -------
FirstFederal Financial Services Corp ("FirstFederal" or the "Company"),
an Ohio corporation, is a savings and loan holding company which has as its
primary wholly-owned subsidiaries First Federal Savings and Loan Association of
Wooster (the "Association"), headquartered in Wooster, Ohio, and Mobile
Consultants, Inc. ("MCi"), a manufactured housing finance company headquartered
in Alliance, Ohio.
Based on total assets as of September 30, 1996, the Company was the
third largest publicly traded thrift in Ohio and within the 100 largest publicly
traded thrifts in the United States. The common stock and two series of
cumulative convertible preferred stock of the Company are traded on the Nasdaq
National Market under the symbols "FFSW," "FFSWP" and "FFSWO," respectively.
Directors and officers of the Company owned approximately 28% of the shares of
the Company's fully diluted common stock at December 31, 1996.
The Company had assets of $1.1 billion, deposits of $671.9 million and
shareholders' equity of $85.3 million as of December 31, 1996. At that same
date, the Company's equity to assets ratio was 7.89%, the Association's tangible
capital ratio was 6.42% and the Association's total risk-based capital ratio was
11.53%. For the year ended December 31, 1996, the Company reported return on
assets and return on equity (excluding a one time assessment of $3.3 million
pre-tax, or $2.2 million after tax, for the recapitalization of the Savings
Association Insurance Fund ("SAIF")) of 1.16% and 14.72%, respectively. The
Company's efficiency ratio for 1996 was 53.3%, excluding the SAIF assessment.
Founded in 1905 as an Ohio chartered mutual thrift, the Association
converted to a federally chartered thrift in 1935 and converted from mutual to
stock form in 1987. The Association serves Ashland, Knox, Medina, Richland,
Wayne and Summit Counties, Ohio (the "Market Area") through its home office, 17
full service branch offices, and three limited service facilities. First Federal
Mortgage Services, Inc. a wholly owned subsidiary of the Association, operates
mortgage loan production offices in the Ohio counties of Stark, Tuscarawas, and
Summit.
The Association offers a wide range of competitive consumer-oriented
lending and deposit products and services in the Market Area. The Association
has achieved significant growth in recent years through the expansion of its
asset origination capabilities and acquiring branches in its Market Area. As of
December 31, 1996, 74.41% of the Association's loan portfolio consisted of loans
secured by one- to four-family residential real estate, 20.90% were consumer
loans, and 4.06% was secured by multifamily residential and commercial
properties. At the present time, virtually all of the real estate loans that
have been originated by the Association are secured by properties located in its
primary market area. See Note 6 to Notes to Consolidated Financial Statements
included in the portions of the Company's Annual Report to the Shareholders for
the fiscal year ended December 31, 1996, filed herewith as Exhibit 13 ("Exhibit
13"). The Association also purchases mortgage-backed securities, which, at
December 31, 1996, totaled $172.5 million, or 15.97% of total assets. In
addition, the Association originates consumer loans and invests in liquid
investments. See Notes
2
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3, 4 and 6 to Notes to Consolidated Financial Statements. The Association has
recently begun to originate commercial business loans. The Association does not
own any non-investment grade corporate debt securities (i.e., securities
commonly known as "junk bonds").
MCi, a manufactured housing finance company which brokers manufactured
home loans to and on behalf of financial institutions, was acquired by the
Company in April 1996. MCi facilitates primarily non-mortgage, consumer loan
contracts through 3,500 dealers of manufactured homes located in 27 states,
primarily in the northeast, southeast, midwest and southwest regions of the
United States. MCi also services the collection and recovery of troubled loans
on behalf of the financial institutions which originate the loans.
In 1995, MCi brokered $97 million in manufactured housing finance
contracts, all of which were sold to other financial institutions. For the
fiscal year ended December 31, 1996, MCi's contract originations totaled $261
million. MCi's earnings and expenses were consolidated into the Company's
financial statements in April 1996 and have become a significant part of the
operations of the Company and its reported results. For the year ended December
31, 1996, MCi contributed approximately $3.1 million to the Company's earnings.
PENDING STRUCTURAL CHANGE
On February 13, 1997, the Association submitted an application to the
Office of the Comptroller of the Currency (the "OCC") to convert from a federal
savings association to a national bank (the "Bank Conversion"). In order to
retain its stock ownership in the Association following the Bank Conversion, the
Association will be submitting an application to the Board of Governors of the
Federal Reserve System (the "FRB") on or about March 20, 1997 to become a bank
holding company (the "Holding Company Conversion") under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). No prediction can be made as to
whether the applications and the Holding Company Conversions submitted to the
OCC and FRB will be approved, or, if approved, whether the Bank Conversion and
the Holding Company Conversion will be consummated. See "Regulation- -Regulation
of the Company Following the Bank Conversion."
The Company's executive offices are located at 135 East Liberty Street,
Wooster, Ohio 44691 and its telephone number at that address is (330) 264-8001.
RECENT AND PENDING ACQUISITIONS
On March 23, 1996, the Association acquired a branch in Mount Vernon,
Ohio from Peoples National Bank. In the transaction, the Association acquired
approximately $26.6 million of consumer deposit liabilities at a premium of 9%.
The deposits were merged into an existing branch of the Association and the real
estate was sold.
On April 3, 1996, the Company acquired MCi. In the transaction, the
Company acquired $7.1 million in assets consisting primarily of advances
receivable on manufactured home loans and furniture and fixtures. The Company
also assumed the liabilities of MCi, which consisted mainly of accounts payable
to dealers and lines of credit. The purchase price of $10.6 million was
3
<PAGE> 4
comprised of $1 million in cash, $4 million in notes due quarterly during 1997,
and 307,386 shares of the Company's common stock, valued at $5.6 million. The
transaction was accounted for under the purchase method of accounting and,
accordingly, the assets and liabilities of MCi were recorded at their estimated
fair value at the date of acquisition. The purchase resulted in a cost in excess
of fair value of net assets of $5.6 million, which will be amortized by the
straight-line method over a period of no longer than 10 years.
On December 30, 1996, the Company entered into an Agreement of
Affiliation and Plan of Merger with Summit Bancorp ("Summit"), the parent
holding company of Summit Bank, an Ohio- chartered commercial bank (the "Merger
Agreement"), pursuant to which Summit will merge with and into the Company, with
the Company as the surviving entity. Under the Merger Agreement, each share of
the common stock of Summit will be exchanged for 1.87 shares of the common stock
of the Company. As currently structured, the Merger is subject to the approval
of the Holding Company Conversion, approval of various regulatory applications
to acquire Summit, and the approval of the stockholders of Summit. At December
31, 1996, Summit had assets of $81.3 million, deposits of $67.8 million, and
stockholders' equity of $7.2 million. For the year ended December 31, 1996,
Summit reported net income of $0.8 million.
SUBSEQUENT EVENT
On March 11, 1997, the Company announced the execution of a definitive
agreement to acquire Alliance Capital Resources ("Alliance"), an originator of
leases of information technology equipment. Under the terms of the definitive
agreement, the shareholders of Alliance will receive cash in exchange for their
shares of Alliance stock. At the closing of the transaction, the Alliance
shareholders will receive an aggregate payment of $2 million in cash, and will
receive rights to participate in the future earnings of Alliance for a five-year
period, provided that the earnings of Alliance meet or exceed certain specified
amounts. The shareholders of Alliance approved the transaction at the time of
execution of the definitive agreement. The transaction is subject to the
approval of certain regulatory authorities, and is currently anticipated to be
completed in the third quarter of 1997.
On March 19, 1997, the Company issued $40.5 million of subordinated
notes due March 15, 2004 at a rate of 9.125% (the "Notes"). The Company expects
to use the net proceeds for general corporate purposes, which may include the
repayment of indebtedness, investments in or extensions of credit to its
subsidiaries and the financing of possible acquisitions. The Notes are subject
to terms and conditions, and to redemption, at the option of the Company, at any
time on or after March 15, 2002, pursuant to the note indenture. The Notes are
unsecured obligations of the Company and are subordinate to all other
indebtedness of the Company and the Association. The Notes are designed to
qualify as Tier 2 capital under FRB regulations.
4
<PAGE> 5
LENDING ACTIVITIES
- ------------------
GENERAL. The primary source of revenue to the Association is interest
income from lending activities. The principal lending activity of the
Association is originating conventional first mortgage real estate loans to
enable borrowers to purchase, construct or refinance one- to four-family
residential real property. The Association also makes consumer loans and, to a
lesser extent, loans secured by multifamily residential and commercial real
estate.
LOAN PORTFOLIO COMPOSITION. The following tables set forth information
concerning the composition of the Association's loans receivable and loans held
for sale in dollar amounts and in percentages, by type of loan at the dates
indicated. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset/Liability Management" in Exhibit 13.
5
<PAGE> 6
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993
--------------------- -------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- --------- -------- --------- --------- --------- -------- ---------
(Dollars in Thousands)
Type of Loan
- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Conventional:
Loans on existing property ................. $517,697 64.89% $456,974 72.67% $402,413 78.22% $318,308 77.81%
Commercial real estate loans ............... 16,593 2.08 26,966 4.29 18,396 3.57 20,838 5.09
Construction(1) ............................ 91,783 11.50 72,504 11.53 41,979 8.16 27,758 6.78
Consumer and deposit account loans ......... 166,778 20.90 72,344 11.51 51,694 10.05 42,221 10.32
Other loans(2) ............................. 4,937 0.63 6 -- -- -- 19 --
-------- -------- -------- -------- -------- -------- -------- --------
Gross loans receivable (before net items) $797,788 100.00% $628,794 100.00% $514,482 100.00% $409,144 100.00%
======== ======== ======== ======== ======== ======== ======== ========
Adjustable-rate loans ...................... $201,644 25.27% $224,388 35.68 $161,492 31.39% $ 93,777 22.92%
Consumer and deposit account loans ......... 166,778 20.90 72,344 11.51 51,694 10.05 42,221 10.32
-------- -------- -------- -------- -------- -------- -------- --------
Subtotal ................................. 368,422 46.17 296,732 47.19 213,186 41.44 135,998 33.24
Fixed-rate loans ........................... 429,366 53.83 332,062 52.81 301,296 58.56 273,146 66.76
-------- -------- -------- -------- -------- -------- -------- --------
Gross loans receivable (before net items) $797,788 100.00% $628,794 100.00% $514,482 100.00% $409,144 100.00%
======== ======== ======== ======== ======== ======== ======== ========
Type of Security
- ----------------
Residential:
Single family ............................. $577,172 72.35% $509,290 80.99% $419,608 81.56% $321,796 78.66%
2-4 family ................................ 16,544 2.06 15,696 2.50 14,230 2.77 11,987 2.93
Other dwelling units ...................... 7,407 0.93 4,492 .71 10,554 2.05 12,283 3.00
Commercial real estate loans ............... 24,950 3.13 26,966 4.29 18,396 3.57 20,838 5.09
Consumer loans ............................. 166,778 20.90 72,344 11.51 51,694 10.05 42,221 10.32
Other loans ................................ 4,937 0.63 6 -- -- -- 19 --
-------- -------- -------- -------- -------- -------- -------- --------
Gross loans receivable (before net items) $797,788 100.00% $628,794 100.00% $514,482 100.00% $409,144 100.00%
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
-------------------
1992
-------------------
Amount Percent
-------- --------
Type of Loan
- ------------
Conventional:
Loans on existing property ................. $249,125 74.00%
Commercial real estate loans ............... 21,625 6.43
Construction(1) ............................ 25,426 7.55
Consumer and deposit account loans ......... 40,463 12.02
Other loans(2) ............................. 25 --
-------- --------
Gross loans receivable (before net items) $336,664 100.00%
======== ========
Adjustable-rate loans ...................... $103,837 30.84%
Consumer and deposit account loans ......... 40,463 12.02
-------- --------
Subtotal ................................. 144,300 42.86
Fixed-rate loans ........................... 192,364 57.14
-------- --------
Gross loans receivable (before net items) $336,664 100.00%
======== ========
Type of Security
- ----------------
Residential:
Single family ............................. $247,923 73.64%
2-4 family ................................ 10,594 3.15
Other dwelling units ...................... 16,034 4.76
Commercial real estate loans ............... 21,625 6.43
Consumer loans ............................. 40,463 12.02
Other loans ................................ 25 --
-------- --------
Gross loans receivable (before net items) $336,664 100.00%
======== ========
<FN>
(1) Comprised of substantially all one- to four-family residential mortgage loans.
(2) Includes commercial, financial and industrial loans.
</TABLE>
6
<PAGE> 7
The following table presents a reconciliation of the Company's loans
receivable and loans held for sale, after net items:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross loans receivable, before net items $797,788 $628,794 $514,482 $409,144 $336,664
Less:
Discounts on loans/unearned income ... -- 3 7 15 35
Loans in process ..................... 36,679 42,888 30,845 21,909 17,830
Deferred loan fees ................... 1,425 1,849 1,850 1,467 1,552
Allowance for loan losses ............ 2,916 2,994 3,204 4,512 3,923
-------- -------- -------- -------- --------
Loans receivable, net ................ $756,768 $581,060 $478,576 $381,241 $313,324
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 8
The following table illustrates the maturities of the Association's loan
portfolio at December 31, 1996. Mortgages which have adjustable or renegotiable
interest rates are shown as maturing when the loans are contractually due. The
table does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses. Management believes that actual prepayments and scheduled
repayments will cause the effective maturities of the Association's loan
portfolio to be significantly shorter than is indicated by the table.
<TABLE>
<CAPTION>
REAL ESTATE
REAL ESTATE CONSTRUCTION CONSUMER AND
MORTGAGE LOANS LOANS OTHER LOANS (1) TOTAL
--------------------- ------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- --------- -------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
DUE DURING YEAR(S) ENDED
DECEMBER 31,
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 ................. $189,351 7.69% $ 91,783 7.55% $ 66,783 9.09% $347,917 7.96%
1998-2001 ............ 153,792 7.39 -- -- 26,602 9.42 180,394 7.69
2002 and following ... 191,147 7.56 -- -- 78,330 9.85 269,477 8.23
-------- -------- -------- -------- -------- -------- -------- --------
Gross loans receivable $534,290 7.56% $ 91,783 7.55% $171,715 9.48% $797,788 7.97%
======== ======== ======== ======== ======== ======== ======== ========
<FN>
(1) Includes manufactured housing loans with typical maturities exceeding five
years, as well as demand loans and loans having no stated maturity.
</TABLE>
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At December 31, 1996, the total amount of loans due after December 31,
1997 which had fixed interest rates was $377.6 million, while the total amount
of loans due after such date which had floating or adjustable rates was $72.3
million.
The table below sets forth the loan origination, purchase and sale
activity of the Association during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
-------- --------- --------
(In Thousands)
<S> <C> <C> <C>
LOANS ORIGINATED:
One- to four-family residential loans:
Fixed-rate ..................................... $316,659 $145,383 $ 96,352
Adjustable-rate ................................ 51,604 85,406 91,475
Multifamily residential and commercial real estate 20,556 3,881 5,948
Consumer and other ............................... 187,421 53,648 27,455
-------- -------- --------
Total loans originated ....................... 576,240 288,318 221,230
-------- -------- --------
LOANS PURCHASED:
One- to four-family residential loans:
Fixed-rate ..................................... -- -- --
Adjustable-rate ................................ -- -- --
Multifamily residential and commercial real estate
(adjustable-rate) ................................ -- 9,581 --
From acquisition of branches ...................... -- 5
-------- -------- --------
Total loans purchased ........................ -- 9,581 5
-------- -------- --------
TOTAL LOANS ORIGINATED AND PURCHASED ............... 576,240 297,899 221,235
LOANS SOLD:
One- to four-family residential loans:
Fixed-rate ..................................... 179,867 87,097 44,376
Adjustable-rate ................................ 41,671 -- --
Consumer and other ............................... 47,391 -- --
-------- -------- --------
Total loans sold .............................. 268,929 87,097 44,376
PRINCIPAL REPAYMENTS AND OTHER ..................... 131,243 108,318 79,509
-------- -------- --------
Total loan sales and repayments ............... 400,172 195,415 123,885
-------- -------- --------
Provision for losses on loans ...................... 360 -- 15
-------- -------- --------
NET LOAN ACTIVITY .................................. $175,708 $102,484 $ 97,335
======== ======== ========
</TABLE>
FEES. In addition to interest earned on loans, the Association receives
fees for loan originations, prepayments, modifications, late payments, transfers
of loans due to changes of property ownership and other miscellaneous services.
The fees vary from time to time, generally depending on the supply of funds and
other competitive conditions in the mortgage market.
Loan origination fees and certain direct origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income over the contractual life of the loan as an adjustment of yield
(prepayments may be anticipated in certain cases). The Association sells some
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<PAGE> 10
loans to the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"). When a loan is sold, the net of
unamortized deferred fees and expenses is considered in the computation of gain
or loss on sale.
LOAN ORIGINATIONS GENERALLY. The Association originates real estate
loans primarily through internal loan production personnel supplemented by
external loan originators who are also employees of the Association. In
addition, First Federal Mortgage Services Inc., a wholly owned subsidiary of the
Association, operates mortgage loan production offices in Canton, Stow and New
Philadelphia, Ohio. Once a borrower has applied for a loan, the complete loan
application package is reviewed by the loan officer. As part of the loan review
process, qualified independent or staff appraisers inspect and appraise the
property that would secure the loan. As part of the review process for
residential loans, information is obtained concerning the income, financial
condition, employment and credit history of the borrower. Loans are approved by
a loan committee, the composition of which is dependent upon the size and type
of loan.
The Association requires evidence of title on all loans secured by real
property and requires fire and extended coverage casualty insurance in amounts
at least equal to the principal amount of the loan or the value of improvements
on the property, depending on the type of loan. The Association may also require
flood insurance to protect the property securing its interest.
Most real estate loans originated by the Association contain a
"due-on-sale" clause providing that the Association may declare the unpaid
principal balance due and payable upon the disposition of the mortgaged
property. The Association enforces these due-on-sale clauses, to the extent
permitted by law, taking other business factors into consideration.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of
the Association's lending program has been the origination and purchase of loans
secured by one- to four-family residences. As of December 31, 1996, $593.7
million, or 74.4% of the Association's loan portfolio consisted of loans,
including construction loans, on one- to four-family residences. As of December
31, 1996, these loans were secured primarily by residences located in the Market
Area. At December 31, 1996, $429.4 million, or 72.3%, of the Association's loans
secured by one- to four-family residences consisted of fixed-rate mortgage
loans.
The Association's current one- to four-family residential
adjustable-rate mortgage loans ("AMLs") have interest rates that adjust based on
various different indexes. The Association's portfolio of AMLs is tied to
several different national indexes. At December 31, 1996, AMLs totaled $201.6
million, or 25.6%, of the Association's one- to four-family mortgage loan
portfolio.
When making a one- to four-family residential mortgage loan, the
Association evaluates both the borrower's ability to make principal and interest
payments and the value of the property that will secure the loan. The
Association generally makes loans on one- to four-family residential property in
amounts of 95% or less of the appraised value thereof. Where loans are made in
amounts which exceed 85% of the appraised value of the underlying real estate,
the Association's policy generally requires private mortgage insurance on a
portion of the loan.
10
<PAGE> 11
The increase in originations of one- to four-family loans by the
Association, from $230.8 million in 1995 to $368.3 million in 1996, was
primarily due to a more favorable interest rate environment and increased
emphasis placed on the Company's mortgage business.
MULTIFAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. As of
December 31, 1996, 4.1% of the Association's loan portfolio aggregating $32.4
million, consisted of real estate loans secured by multifamily residential and
commercial properties. The Association's multifamily residential and commercial
real estate loans include permanent loans secured by liens on apartments,
condominiums, churches, office buildings, shopping centers, motels and other
commercial properties.
Properties securing multifamily residential and commercial loans
originated by the Association are appraised at the time of the loan by
appraisers designated by the Association or the lead lender in the case of a
loan participation. Although the Association is permitted to invest in loans up
to 100% of the appraised value of a property on multifamily residential and
commercial real estate loans, the Association limits its investment to amounts
of 80% or less of the appraised value of the underlying collateral. In
underwriting these loans or evaluating the purchase of loan participations
therein, it is the policy of the Association to consider, among other things,
the terms of the loan, the creditworthiness and experience of the borrower, the
location and quality of the collateral, the debt service coverage ratio and the
past performance of the project. Investments in multifamily residential and
commercial real estate loans are reviewed and approved by the Commercial Loan
Committee. The Commercial Loan Committee is comprised of the President Chief
Operating Officer, the Senior Vice President, the Senior Vice President -
Lending, the Vice President - Commercial Lending and the Vice President -
Regional Manager of Medina County. Loans in excess of $1,000,000 must be
submitted to a Directors' Loan Committee for a decision, after being recommended
by the Commercial Loan Committee.
SALES, PURCHASES, REPAYMENTS AND SERVICING OF REAL ESTATE LOANS. In
order to generate funds for additional lending activities, the Association, from
time to time, sells loans in the secondary market, as favorable market
conditions arise. In many instances, the Association has sold loans after
deliberations over market conditions which include consideration of interest
rate risk and local demand. This decision is based primarily on market
conditions as well as the determination at the time of origination whether the
loan is originated for sale or to be held for investment. To date, all of the
Association's sales activities have involved one- to four-family residential
mortgage loans. Loan sales can enable the Association to recognize unamortized
loan fee income and reduce interest rate risk while meeting local market demand.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition" and "- Asset/Liability Management" in Exhibit
13.
In 1996, the Association sold a total of $268.9 million, net, in loans,
an increase of $181.8 million from the $87.1 million, net, sold in 1995. This
increase in sales was primarily the result of the Association's strategic focus
of diversifying the loan portfolio, thus requiring a smaller volume of mortgage
loan originations to be retained by the Association.
11
<PAGE> 12
When mortgage loans are sold, the Association retains the
responsibility for servicing the loans. The fees received by the Association for
loan servicing vary but are generally calculated as an amount equal to a rate of
.25% per annum on the outstanding principal amount of the loans serviced. At
December 31, 1996, the Association serviced $371.1 million of mortgage loans
sold to others.
Gains and losses on sales of loans are recognized at the time of sale.
When loans sold have an average contractual interest rate that differs from the
purchaser's yield less the servicing fee, resulting gains or losses are
recognized in an amount equal to the present value of the differential over the
estimated remaining life of the loans. Any resulting discount or premium is
amortized over the same estimated life using the interest method.
The Association experienced a decrease of $25.9 million in repayments
on loans from $105.4 million in 1993 to $79.5 million in 1994, due primarily to
the rising interest rate environment prevailing during the second half of 1994
which slowed both refinancing and principal repayments. During 1995, repayments
increased by $28.8 million to $108.3 million due primarily to a more favorable
or lower interest rate environment for the last half of the year which increased
loan production. During 1996 repayments increased by $22.9 million to $131.2
million due principally to the larger volume of loans in the Association|s
portfolio.
CONSUMER LENDING. Federal laws and regulations permit federally
chartered savings institutions to make secured and unsecured consumer loans in
an aggregate amount, together with investments in commercial paper or corporate
debt securities, of up to 35% of the institution's total assets. In addition, a
federally chartered savings institution has lending authority above the 35%
limit for certain consumer loans, such as home equity loans (loans secured by
the equity in the borrower's residence but not necessarily for the purpose of
improvement), property improvement loans, deposit account secured loans and
educational loans.
The Association originates consumer loans for any personal, family or
household purpose, such as the financing of the purchase of manufactured homes,
home improvements, automobiles, boats, recreational vehicles and education. In
addition, the Association expanded its home equity lending program including
loans made pursuant to lines of credit secured by mortgage liens on the
borrower's principal or second residence. The Association's origination of
consumer and other loans has steadily increased from $14.2 million in 1991 to a
record $187.4 million in 1996. The primary component, $107.7 million or 57.5%,
of consumer and other loans was the origination of manufactured housing loans.
Manufactured housing loan originations increased 3,374% for 1996 because of the
Company's acquisition of MCi. Such loans involve a greater degree of risk than
single family residential loans but carry higher yields and shorter average
maturities. It is anticipated that the number and amount of the Company's
manufactured housing loans will continue to increase as a result of the
acquisition of MCi; however, it is management's intent to sell most of these
loans through securitizations.
In October 1996, the Company securitized $48.9 million of manufactured
housing loans in a private placement of Senior/Subordinated Pass Through
Certificates Series 1996-1. As a result of this securitization, the Company
recorded a $6.6 million retained interest, which consists of an
overcollateralization of loans and the unamortized balance of the present value
of the interest rate
12
<PAGE> 13
differential resulting from the sale of loans with servicing rights retained.
The residual interest is amortized over the estimated life of the underlying
loans sold. The carrying value of the residual interest is analyzed quarterly by
the Company to determine whether prepayment and default experience has any
impact on this carrying value.
MCi not only originates manufactured housing loans for the Association
but also brokers loans to other financial institutions. MCi brokered $261
million in loans for the year ended December 31, 1996, $153.3 million or 58.7%
of which were brokered to financial institutions other than the Association. MCi
receives an origination fee from these brokerage activities. Since April 3,
1996, the date of the Company's acquisition of MCi, $6.7 million of brokerage
fees were recognized by MCi. The brokerage of loans to financial institutions
other than the Association is expected to become a smaller percentage of MCi's
originations. Loans originated by MCi for the Association are subject to the
underwriting standards of the Association.
In 1995 and 1996, home equity lines of credit loans comprised an
additional 30.6% and 13.3%, respectively, of consumer loan originations. The
Association continues to expand its consumer loan originations as it looks to
better service the market it is already in. The expansion includes a continued
emphasis on both equity lines of credit loans and manufactured housing loans.
These loans offer higher yields and provide greater flexibility in interest rate
risk management since the average lives are very short compared to mortgage
loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management"in Exhibit 13.
Nonperforming Assets and Delinquencies.
---------------------------------------
General. When a borrower fails to make a required payment on a loan,
the Association attempts to cause the deficiency to be cured by contacting the
borrower. A notice is mailed to the borrower after a payment is five days past
due and again when the loan is 15 days past due. In most cases, deficiencies are
cured promptly. When deemed appropriate by management, the Association
institutes appropriate action to foreclose on the property or to acquire it by
deed in lieu of foreclosure. If foreclosed on, real property is sold at a public
sale. In most foreclosure sales, the Association acquires title to the property,
and later sells the property.
Classified Assets. The OTS has adopted a classification system for
problem assets of savings associations. Under this classification system,
problem assets of insured institutions are classified as "Substandard,"
"Doubtful," or "Loss." An asset is considered "Substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institutions will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the weaknesses inherent in those classified
"Substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
13
<PAGE> 14
When a savings association classifies problem assets as either
Substandard or Doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When a savings association
classifies problem assets as "Loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified or to charge off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the OTS as well as the FDIC, either of which can order the
establishment of additional general or specific loss allowances.
In connection with the filing of periodic reports with the OTS, the
Association regularly reviews the problem loans in its portfolio to determine
whether any loans require classification in accordance with applicable
regulations. At December 31, 1996, $2.4 million of the Association's assets were
classified as Substandard, none as Doubtful or Loss.
14
<PAGE> 15
Delinquencies. The table below sets forth information concerning
delinquent mortgages and other loans at December 31, 1996 and 1995. The amounts
presented represent the total remaining principal balances of the related loans,
rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------
1996 1995
----------------------------- --------------------------
Amount Percent of Amount Percent of
Contractually Total Loans, Contractually Total Loans,
Delinquent Net Delinquent Net
--------------- ------------ ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
LOANS DELINQUENT FOR:
30-59 Days
- ----------
One- to four-family residential loans ..... $ 7,676 1.01% $ 1,125 .21%
Multifamily residential and commercial real
estate loans ............................. 602 .08 88 .02
Consumer and other loans .................. 3,129 .41 540 .10
60-89 Days
- ----------
One- to four-family residential loans ..... 2,105 .28 258 .05
Multifamily residential and
commercial real estate loans ............ 81 .01 -- --
Consumer and other loans .................. 579 .08 126 .02
90 Days and Over
- ----------------
One- to four-family residential loans ..... 2,100 .28 306 .06
Multifamily residential and
commercial real estate loans ............ 644 .09 892 .16
Consumer and other loans .................. 846 .11 227 .04
------ ---- ------ ----
Total ................................ $17,762 2.35 $ 3,562 .66%
====== ==== ====== ====
</TABLE>
Delinquent loans as shown in the above table increased by $14.2 million or
398.7% partially as the result of a data conversion at the Association during
the third and fourth quarters of 1996. Collections activity during the
conversion was hampered by inaccurate delinquency reporting, which resulted in
an increase in delinquencies in 1996. The delinquency reporting was corrected in
the first quarter of 1997. As of February 28, 1997 total loans delinquent
greater than 30 days had decreased to 1.60% of total loans, net, marking a 31.9%
improvement from December 31, 1996.
15
<PAGE> 16
Nonperforming Assets. The table below sets forth the amounts and
categories of risk elements in the Association's loan portfolio. Nonperforming
assets include nonaccrual loans, loans 90 days or more past due, restructured
loans and assets acquired in settlement of loans. Loans are placed on nonaccrual
status when the collection of principal or interest becomes doubtful. In
addition, one- to four-family residential mortgage loans and multifamily
residential and commercial real estate loans are placed on nonaccrual status
when the loan becomes 90 days or more contractually delinquent. Troubled debt
restructurings are loans which have involved forgiving a portion of interest or
principal or loans made at a rate materially less than that of market rates.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
One- to four-family residential................... $2,100 $ 306 $ 523 $ 748 $ 591
Multifamily residential and
commercial real estate........................... 644 892 80 2,308 2,454
Consumer.......................................... 846 227 228 334 290
------ ------ ------ ------ ------
Total.......................................... 3,590 1,425 831 3,390 3,335
------ ------ ------ ------ ------
Total nonaccruing loans as a
percentage of total assets.................... .32% .15% .10% .50% .58%
Accruing loans contractually past
due 90 days or more................................ $ --- $ --- $ --- $ --- $ 957
------ ------ ------ ------ ------
Assets acquired in settlement of loans:
One- to four-family residential................... --- 16 10 23 9
Multifamily residential and
commercial real estate........................... 216 76 --- --- ---
Consumer.......................................... 25 7 20 30 123
------ ------- ------ ------ ------
Total.......................................... $ 241 $ 99 $ 30 $ 53 $ 132
------ ------- ------ ------ ------
Total assets acquired in settlement of loans as a
percentage of total assets.................... .02% .01% ---% .01% .02%
Troubled debt restructuring:
Restructured mortgage loans....................... $ 340 $ 366 $2,714 $ 491 $ 590
------ ------- ------ ------ ------
Total restructured mortgage loans
as a percentage of total assets............... .03% .04% .32% .07% .10%
Total nonperforming and restructured assets......... $4,171 $1,890 $3,575 $3,934 $5,014
====== ====== ====== ====== ======
Total nonperforming and restructured
assets as a percentage of total
assets............................................. .37% .20% .43% .58% .88%
====== ====== ====== ====== ======
</TABLE>
The gross interest income on loans accounted for on a non-accrual basis
that would have been recorded as income for the year ended December 31, 1996 had
the loans been current in accordance with their original terms totaled $146
thousand. No interest income on such loans was recorded for the year ended
December 31, 1996 after the respective dates on which such loans became
non-accrual loans.
Allowances for Losses. It is management's policy to establish
allowances for credit losses and to value real estate at the lower of cost or
estimated fair value when it determines that losses are expected to be incurred
on the loans for the underlying properties. While management believes that
16
<PAGE> 17
it uses the best information available to make such determinations, future
adjustments may be necessary and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
initial determination. At December 31, 1996, the Association had approximately
$2.9 million in an allowance for losses on loans compared to $3.0 million at
December 31, 1995. The allowance for losses on loans represented 76.1% and
158.4% of total nonperforming and restructured assets at December 31, 1996 and
1995, respectively. See Note 8 of the Notes to the Consolidated Financial
Statements in Exhibit 13 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition" in Exhibit 13.
17
<PAGE> 18
The following table is a summary of the activity of mortgage, other
loan and real estate owned credit loss allowances, charge-offs and recoveries
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Allowance for Loan Losses
- -------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ................ $2,994 $3,204 $4,512 $3,923 $2,248
Provision for credit losses ................. 360 -- 15 1,025 1,884
Allowance for possible losses on loans
acquired ................................... -- -- -- -- --
Charge-offs:
One- to four-family ........................ 57 52 63 23 78
Consumer ................................... 122 173 164 206 149
Multifamily, commercial and other .......... 275 -- 1,110 253 --
Recoveries .................................. 16 15 14 46 18
------ ------ ------ ------ ------
Balance at end of year ...................... $2,916 $2,994 $3,204 $4,512 $3,923
------ ------ ------ ------ ------
Allowance for Real Estate Owned
- -------------------------------
Balance at beginning of year ................ $ -- $ -- $ -- $ -- $ 22
Provision for credit losses ................. -- -- -- -- --
Charge-offs ................................. -- -- -- -- 22
Recoveries .................................. -- -- -- -- --
------ ------ ------ ------ ------
Balance at end of year ...................... $ -- $ -- $ -- $ -- $ --
====== ====== ====== ====== ======
Allowance as a percentage of period-end loans
and assets acquired in settlement of loans:
Mortgage and other loans .................. .39% .55% .67% 1.18% 1.25%
Assets acquired in settlement of loans .... -- -- -- -- --
Ratio of net charge-offs during the period to
average loans outstanding during the period .06 .04 .32 .13 .08
Ratio of allowance for loan losses to total
loans, net of unearned income ............. .39 .55 .67 1.18 1.25
Ratio of allowance for loan losses to non-
accrual loans ............................. 81.22 210.11 385.56 133.10 117.63
</TABLE>
18
<PAGE> 19
The table below sets forth the allocation of the allowance for loan
losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- -----------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
One- to four-family ...... $ 593 20.3% $ 616 20.6% $ 867 27.1% $ 645 14.3% $ 310 7.9%
Multifamily and commercial
real estate ............. 1,633 56.0 1,702 56.8 1,453 45.3 3,245 71.9 3,098 79.0
Consumer and other ....... 690 23.7 676 22.6 884 27.6 622 13.8 515 13.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for loan
losses .................. $2,916 100.0% $2,994 100.0% $3,204 100.0% $4,512 100.0% $3,923 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
INVESTMENT ACTIVITIES
- ---------------------
The Association invests primarily in short-term investments, including
United States Treasury securities, bank certificates of deposit, FHLB overnight
funds, government agency issues and investment grade, marketable corporate debt
securities. The Association has never invested in non-investment grade
investment securities, and, under federal law, is not permitted to invest in
such securities. There are various other regulatory restrictions on investments
by the Association. Federal regulations require that commercial paper must
mature within 270 days of issuance. Moreover, the Association's total investment
in the commercial paper and corporate debt securities of any one issuer may not
exceed its loans-to-one-borrower limitation. The Association's policy governing
investment activities, however, is more restrictive than the applicable federal
regulations. Consequently, at December 31, 1996, the Association was in
compliance with all such requirements.
The Association is required by federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified securities and
is also permitted to make certain other securities investments. The balance of
the securities investments maintained by the Association above regulatory
requirements reflects for the most part management's primary investment
objective of maintaining liquidity at a level that ensures the availability of
adequate funds, taking into account anticipated cash flows and available sources
of credit, for meeting savings withdrawal requests and loan commitments and
making other investments.
In addition to using the securities investments for liquidity purposes,
the Association also uses the investment portfolio to help manage interest rate
risk, and reduce the gap between the effective maturities of its
interest-bearing liabilities and its interest-earning assets.
At December 31, 1996, the Association's investments, consisting of
interest-earning deposits in other financial institutions, investment securities
and mortgage-backed securities, totaled $235.5 million, or 21.8%, of total
assets at that date. See Notes 3 and 4 of Notes to Consolidated Financial
Statements in Exhibit 13.
19
<PAGE> 20
The following schedule illustrates the interest rate sensitivity of the
Company's mortgage-backed securities portfolio, investment securities portfolio
and cash in other financial institutions at December 31, 1996. Amounts are
stated at book value and do not reflect accrued interest.
<TABLE>
<CAPTION>
OVER ONE OVER FIVE
YEAR THROUGH YEARS THROUGH
ONE YEAR OR LESS FIVE YEARS TEN YEARS OVER TEN YEARS TOTAL
----------------- ----------------- ------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- --------- -------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury ..................... $ -- ---% $ -- ---% $ -- ---% $ -- ---% $ -- ---%
U.S. Government agencies and
corporations
57,771 6.04 47,462 6.29 10,354 6.22 9,798 5.87 125,385 6.14
Collateralized mortgage obligations
and other mortgage pass through
certificates ..................... 79,855 6.35 17,038 6.46 68 6.47 -- -- 96,961 6.37
Corporate obligations ............. 112 5.97 2,440 6.17 -- -- -- -- 2,552 6.16
Other(1)(2) ....................... 9,000 5.29 150 7.92 -- -- 1,484 7.97 10,634 5.70
-------- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total ........................... $146,738 6.16 % $67,090 6.33% $10,422 6.22% $11,282 6.15% $235,532 6.22%
======== ==== ======= ==== ======= ==== ======= ==== ======== ====
- ----------------
<FN>
(1) Comprised of certificates of deposit in other financial institutions and
municipal securities.
(2) Yields on tax-exempt obligations were not computed on a tax equivalent
basis.
</TABLE>
20
<PAGE> 21
The following table sets forth the composition of the Association's
mortgage-backed securities and investment portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995 1994
---------------------- ---------------------- -----------------------
BOOK % OF BOOK % OF BOOK % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
--------- --------- ---------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks ......... $ 9,000 100.00% $ 8,862 100.00% $ 1,097 100.00%
Federal funds sold ........................... -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total ...................................... $ 9,000 100.00% $ 8,862 100.00% $ 1,097 100.00%
======== ====== ======== ====== ======== ======
Investment securities:
U.S. government securities .................. $ -- ---% $ 8,750 2.73% $ 9,136 2.79%
Federal agency obligations .................. 125,385 51.38 158,270 49.30 149,908 45.83
Collateralized mortgage obligations and other
mortgage pass through certificates ......... 96,961 39.73 135,574 42.23 152,593 46.66
Floating-rate notes and corporate debt ...... 2,552 1.05 3,281 1.02 2,494 .76
State and local government obligations ...... 1,634 .68 994 .31 547 .17
-------- ------ -------- ------ -------- ------
Subtotal .................................... 226,532 92.84 306,869 95.59 314,678 96.21
FHLB stock .................................. 17,485 7.16 14,172 4.41 12,403 3.79
-------- ------ -------- ------ -------- ------
Total investment securities and FHLB stock .. $244,017 100.00% $321,041 100.00% $327,081 100.00%
======== ====== ======== ====== ======== ======
Average remaining life or term to repricing,
excluding FHLB stock........................ 5.1 years 5.8 years 8.6 years
</TABLE>
21
<PAGE> 22
At December 31, 1996, the Association did not have any mortgage-backed
securities or investment securities (exclusive of obligations of the U.S.
Government and federal agencies) issued by any one entity with a total book
value in excess of 10% of stockholders' equity.
In the normal course of its business, the Association is a party to
financial instruments with off-balance sheet risk, including commitments to
extend credit. These instruments are designed to meet the financing need of the
Association's customers and to reduce the Association's exposure to fluctuations
in interest rates. See Note 7 to Notes to Consolidated Financial Statements.
SOURCES OF FUNDS
- ----------------
GENERAL. Deposit accounts have traditionally been a principal source of
the Association's funds for use in lending and for other general business
purposes. In addition to deposits, the Association derives funds from payments
on mortgage loans and mortgage-backed securities, cash flows generated from
operations, which includes interest credited to deposit accounts, FHLB of
Cincinnati advances and other borrowings and loan sales. Scheduled loan payments
are a relatively stable source of funds, while deposit inflows and outflows and
the related cost of such funds vary greatly. Borrowings may be used on a
short-term basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels and may be used on a longer term basis to
support expanded lending activities. The availability of funds from loan sales
is influenced by general interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in Exhibit 13.
DEPOSITS. The Association attracts both short-term and long-term
deposits from the general public by offering a wide assortment of accounts and
rates. The Association offers regular and premium passbook accounts, checking
accounts, money market accounts, fixed interest rate certificates of deposit
with varying maturities, negotiated rate jumbo certificates of deposit of
$100,000 or more ("Jumbo CDs") and individual retirement accounts. During the
second half of 1995, the Association started a promotion of high performance
checking accounts to attract additional core deposits and enhance fee income. As
a result, the Association increased the number of checking accounts with
customers by 9,555 or 32.4% to 39,020. The resultant increase in the balance of
checking account deposits was $18.8 million or 28.0% to $86.1 million. See Note
11 of Notes to Consolidated Financial Statements in Exhibit 13.
22
<PAGE> 23
The principal types of savings accounts and average rates paid by the
Association at the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------- ------------------------------- --------------------------------
AVERAGE AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL BALANCE RATE OF TOTAL BALANCE RATE OF TOTAL
------------ -------- --------- -------- -------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook/statement ........... $132,874 3.06 % 21.25 % $127,789 3.02 % 24.37% $151,214 3.03 % 31.18%
NOW
Noninterest bearing ........ 20,090 -- 3.22 8,804 1.68 6,679 1.38
Interest bearing ........... 57,547 2.07 9.19 49,746 1.89 9.49 44,293 1.93 9.13
Money Market ................. 14,034 3.44 2.24 12,537 3.38 2.39 15,507 2.52 3.20
Certificates of Deposit ...... 400,972 5.84 64.10 325,391 5.81 62.07 267,227 4.81 55.11
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total .................. $625,517 4.66 % 100.00% $524,267 4.60 % 100.00% $484,920 3.85 % 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
23
<PAGE> 24
The following table indicates the amount of the Association's
certificates of deposit and other deposits of over $100,000 by time remaining
until maturity as of December 31, 1996.
<TABLE>
<CAPTION>
PASSBOOK,
NOW AND
MONEY
CERTIFICATES MARKET
MATURITY PERIOD OF DEPOSITS ACCOUNTS
- --------------------------------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Three months or less ........... $23,993 $49,431
Three through six months ....... 13,505 --
Six through twelve months....... 14,196 --
Over twelve months ............. 45,928 --
------- -------
Total .................... $97,622 $49,431
======= =======
</TABLE>
The following table sets forth information relating to the
Association's savings flows during the periods shown and total savings at the
end of the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Opening balance .................... $ 574,041 $ 502,527 $ 453,821
Net deposits or (withdrawals) ...... 47,587 52,176 (13,925)
Deposits acquired in acquisition.... 26,028(1) -- 46,698(1)
Interest credited .................. 24,262 19,338 15,933
--------- --------- ---------
Ending balance ..................... $ 671,918 $ 574,041 $ 502,527
========= ========= =========
Net increase in savings deposits .... $ 97,877 $ 71,514 $ 48,706
========= ========= =========
- ------------------
<FN>
(1) Amount represents all of the deposit liabilities of branch offices of
other financial institutions assumed by the Association. These
acquisitions include a branch office on Gay Street in Mount Vernon,
Ohio in 1996, and a branch office on Park Avenue in Mansfield, Ohio in
1994.
</TABLE>
24
<PAGE> 25
The following table sets forth the amount, by interest rates, of total
deposits at the Association as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Below 5.25%........................................... $266,350 $260,433 $385,896
5.25% - 8.00%........................................ 392,911 299,530 101,693
8.01% - 10.00%........................................ 12,191 13,625 13,925
10.01% - 13.00%........................................ 466 453 1,013
-------- -------- --------
Total................................................ $671,918 $574,041 $502,527
======== ======== ========
</TABLE>
The following table sets forth the amounts of certificates of deposits
maturing during the years indicated.
<TABLE>
<CAPTION>
AMOUNTS MATURING WEIGHTED AVERAGE
IN THE YEAR RATE
------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1997.................... $249,435 5.62%
1998.................... 92,654 6.17
1999.................... 41,717 6.21
2000 and thereafter. . . 44,135 6.42
-------- ----
Total............... $427,941 5.88%
======== ====
</TABLE>
BORROWINGS. Apart from deposits, the Association's principal source of
funds in recent years has been advances from the FHLB of Cincinnati. As a member
of the FHLB of Cincinnati, the Association is required to own capital stock in
the FHLB of Cincinnati and is authorized to apply for advances from the FHLB of
Cincinnati. Each FHLB credit program has its own interest rate, which may be
fixed or variable, and range of maturities. The FHLB of Cincinnati may prescribe
the acceptable uses to which these advances may be put, as well as limitations
on the size of the advances and repayment provisions.
The Association had outstanding, at December 31, 1996, $286.8 million
of FHLB advances, compared to $262.1 million at December 31, 1995. Of the amount
outstanding at December 31, 1996, $67.6 million were short-term advances, while
$219.2 million were long-term advances. This compares with $37.4 million in
short-term advances and $224.7 million in long-term advances at December 31,
1995.
See Note 12 of Notes to Consolidated Financial Statements in Exhibit 13
for a description of the terms of FHLB advances.
25
<PAGE> 26
The following table sets forth certain information as to the
Association's short-term FHLB advances (borrowings with remaining maturities of
one year or less) at and for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER, 31
-----------------------------------------------------
1996 1995 1994
-----------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term FHLB advances at period end.............. $67,648 $37,369 $74,900
Average amount of short-term FHLB advances
outstanding during period.......................... 50,730 61,098 43,792
Maximum month-end short-term FHLB advances
outstanding during period.......................... 84,737 85,900 74,900
Weighted average interest rate of total short-term
borrowings at period end........................... 5.98% 5.30% 5.59%
Weighted average interest rate of total short-term
borrowings during the period....................... 5.73% 5.65% 5.10%
</TABLE>
The Association had securities sold under agreements to repurchase of
$20.4 million outstanding at December 31, 1996. Securities sold under agreements
to repurchase at December 31, 1996 generally have an original term to maturity
of 30 days. There were $24.7 million under agreements to repurchase at December
31, 1995. See Note 13 to the Consolidated Financial Statements in Exhibit 13.
THE ASSOCIATION'S SUBSIDIARY ACTIVITIES
- ---------------------------------------
OTS regulations permit federally chartered institutions to invest in
the capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries, and joint ventures in which such subsidiaries are participants, in
an aggregate amount not exceeding 2% of an institution's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner city development purposes. In addition, federal regulations permit
institutions to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the institution owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the institution's
total capital. Federally chartered institutions are also authorized to invest
without limitation in subsidiaries engaged solely in activities that the
association may engage in directly. See "-Regulation." At December 31, 1996, the
Association's total equity investment in its service corporations was $2.0
million, excluding its investment in its finance subsidiary discussed below.
A federally chartered institution may invest up to 30% of its assets in
finance subsidiaries. In 1996, the Association established FirstFed Corp, a
finance subsidiary, for the sole purpose of issuing securities backed by pools
of manufactured housing loans. At December 31, 1996, the Association's total
equity investment in this finance subsidiary was $5.5 million.
Home Financial Services Corporation, a subsidiary, contracts with
INVEST Financial Corporation ("INVEST") of Tampa, Florida. INVEST provides
certain securities brokerage and
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investment advisory services through the operation of INVEST service centers in
certain Association offices.
H.F.S. Agency, Inc., a subsidiary, engages in the business of an
insurance agency. H.F.S. Agency, Inc. sells fixed-rate annuities and other life
insurance products.
First Federal Mortgage Services Inc., a subsidiary, operates mortgage
loan production offices in Canton, Stow and New Philadelphia, Ohio.
Professional Appraisal Services Corp., a subsidiary, performs real
estate appraisal services for the Association, other financial institutions,
insurance companies and others.
Venture Mortgage Corp., a service corporation, was formed during 1995.
It owns a fifty percent interest in American Federal Mortgage Company, which
operates as a residential mortgage broker in Mansfield, Ohio.
COMPETITION
- -----------
The Association faces strong competition both in originating real
estate loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks and
mortgage bankers that also make loans secured by real estate located in the
Market Area. The Association competes for real estate loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers and realtors.
The Association faces substantial competition in attracting deposits
from other savings institutions, commercial banks, money market funds and mutual
funds, credit unions and other investment vehicles. The ability of the
Association to attract and retain deposits depends on its ability to provide
investment opportunities that satisfy the requirements of investors as to rate
of return, liquidity, risk and other factors. The Association competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours, and convenient branch locations with inter-branch
deposit and withdrawal privileges at each.
REGULATION
- ----------
GENERAL. The Association is a federally chartered stock savings and
loan association, the deposits of which are federally insured and backed by the
full faith and credit of the United States Government. Accordingly, the
Association is subject to broad federal regulation and oversight extending to
all its operations. The Association is a member of the FHLB of Cincinnati and is
subject to certain limited regulation by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). As the parent savings and loan holding
company of the Association, the Company also is subject to federal regulation
and oversight. The purpose of the regulation of the Company and other savings
and loan holding companies is to protect subsidiary savings associations. The
Association is a member of the Savings Association Insurance Fund ("SAIF") and
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<PAGE> 28
the deposits of the Association are insured by the FDIC. As a result, the FDIC
has certain regulatory and examination authority over the Association.
As noted elsewhere herein, on February 13, 1997 the Association
submitted an application to the OCC to convert from a federal savings
association to a national bank. Assuming consummation of the Bank Conversion,
the Association will be a national bank and its deposit accounts will continue
to be insured by the SAIF. As a national bank, the Association also will be
required to become a member of the Federal Reserve System. The Association will
be subject to supervision, examination and regulation by the OCC (rather than
the OTS) and to OCC regulations governing such matters as capital standards,
mergers, establishment of branch offices, subsidiary investments and activities
and general investment authority, and it will remain subject to the FDIC's
authority to conduct special examinations. The Association will be required to
file reports with the OCC concerning its activities and financial condition and
will be required to obtain regulatory approvals prior to entering into certain
transactions, including mergers with, or acquisitions of, other depository
institutions.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this report.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Association is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. The last regular
OTS and FDIC examinations of the Association were as of December 4, 1995. When
these examinations are conducted by the OTS and the FDIC, the examiners may
require the Association to provide for higher general or specific loan loss
reserves. All savings associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the operations of the
OTS. The Association's OTS assessments for the fiscal year ended December 31,
1996, totaled $198,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Association and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Association is in compliance with the noted
restrictions. Following the Bank Conversion, the Association will
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<PAGE> 29
be able to branch throughout the State of Ohio; however its interstate branching
authority will be restricted. See "--Regulation of the Company Following the
Bank Conversion--Interstate Banking and Branching."
The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 1996, the Association's lending
limit under this restriction was $10.7 million. The Association is in compliance
with the loans-to-one-borrower limitation. These restrictions will continue to
apply to the Association following completion of the Bank Conversion.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. Following completion of the Bank
Conversion, the Association will be subject to substantially similar guidelines
adopted by the OCC.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Association is a
member of the SAIF, which is administered by the FDIC. The deposits of the
Association are insured up to applicable limits by the FDIC and such insurance
is backed by the full faith and credit of the United States Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the SAIF or
the BIF. The FDIC also has the authority to initiate enforcement actions against
savings associations, after giving the OTS an opportunity to take such action,
and may terminate the deposit insurance if it determines that the institution
has engaged in unsafe or unsound practices or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve
29
<PAGE> 30
ratio to that designated reserve level, or such higher reserve ratio as
established by the FDIC. The FDIC may also impose special assessments on SAIF
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF in order to maintain the reserve ratio of the
BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio, the FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits. The revisions
became effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ration until the year 2002. As
a result, SAIF insured institutions would continue to be generally subject to
higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted on September 30,
1996. The legislation provides for a one-time assessment to be imposed on all
deposits assessed at the SAIF rates, as of March 31, 1995, in order to
recapitalize the SAIF. It also provides for the merger of the BIF and SAIF on
January 1, 1999 if no savings associations then exist. The special assessment
rate was established at .657% of deposits by the FDIC and the resulting
assessment of $3.3 million was paid by the Association in November 1996. This
special assessment significantly increased noninterest expense and adversely
affected the Association's results of operations for the year ended December 31,
1996. As a result of the special assessment, the Association's deposit insurance
premium was reduced to .065% of deposits based upon its current risk
classification and the new assessment schedule of SAIF-insured institutions.
These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions remained subject to a FICO assessment as a
result of this continuing obligation. Although the legislation also now requires
assessments to be made on BIF- assessable deposits for this purpose, effective
January 1, 1997, that assessment is now limited to 20% of the rate imposed on
SAIF-assessable deposits until the earlier of December 31, 1999 or when no
savings association continues to exist, thereby imposing a greater burden on
SAIF member institutions such as the Association. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The precise rates to be established by the FDIC to
implement this requirement for all FDIC-insured institutions are uncertain at
this time but the assessments are anticipated to be approximately 6.5 basis
points on SAIF deposits and 1.5 basis points on BIF deposits until BIF-insured
institutions participate fully in the repayment of FICO obligations.
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<PAGE> 31
The Association's deposits will continue to be insured by the SAIF
following completion of the Bank Conversion.
Regulatory Capital Requirements.
--------------------------------
FEDERAL SAVINGS ASSOCIATIONS. Federally insured savings associations,
such as the Association, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At December 31, 1996, the Association had tangible capital of $68.2
million, or 6.42% of adjusted total assets, which is approximately $52.3 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio.
At December 31, 1996, the Association had core capital equal to $68.2
million, or 6.42% of adjusted total assets, which is $36.3 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances
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<PAGE> 32
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the
Association had no capital instruments that qualify as supplementary capital and
$2.6 million of general loss reserves, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Association had no
such exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On December 31, 1996, the Association had total capital of $70.9
million (including $68.2 million in core capital and $2.7 million in qualifying
supplementary capital) and risk-weighted assets of $614.8 million (including
$28.3 million in converted off-balance sheet assets); or total capital of 11.53%
of risk-weighted assets. This amount was $21.7 million above the 8% requirement
in effect on that date.
NATIONAL BANKS. Upon consummation of the Bank Conversion, the
Association will no longer be subject to OTS capital regulations, but will be
subject to the capital regulations of the OCC. The OCC's regulations establish
two capital standards for national banks: a leverage requirement and a
risk-based capital requirement. In addition, the OCC may, on a case-by-case
basis, establish individual minimum capital requirements for a national bank
that vary from the requirements which would otherwise apply under OCC
regulations. A national bank that fails to
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<PAGE> 33
satisfy the capital requirements established under the OCC's regulations will be
subject to such administrative action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier
1 capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of the same components as core
capital under the OTS's capital regulations, except that no intangibles except
certain PMSRs and PCCRs may be included in capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at least
8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital" (as described below), provided that the amount of Tier 2
capital may not exceed the amount of Tier 1 capital, less certain assets. The
components of Tier 2 capital under the OCC's regulations generally correspond to
the components of supplementary capital under OTS regulations. Total
risk-weighted assets generally are determined under the OCC's regulations in the
same manner as under the OTS's regulations.
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of its
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the measurement system set
forth in the proposal or the institution's internal model for measuring such
exposure, if such model is determined to be adequate by the institution's
examiner. Small institutions that are highly capitalized and have minimal
interest rate risk, such as the Association, would be exempt from the rule
unless otherwise determined by the OCC. Management of the Association has not
determined what effect, if any, the OCC's proposed interest rate risk component
would have on the National Bank's capital if adopted as proposed.
Prompt Corrective Action. The OTS and the FDIC are authorized and,
under certain circumstances required, to take certain actions against savings
associations that fail to meet their capital requirements. The OTS is generally
required to take action to restrict the activities of an "undercapitalized
association" (generally defined to be one with less than either a 4% core
capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based
capital ratio). Any such association must submit a capital restoration plan and
until such plan is approved by the OTS may not increase its assets, acquire
another institution, establish a branch or engage in any new activities, and
generally may not make capital distributions. The OTS is authorized to impose
the additional restrictions that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
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<PAGE> 34
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on the Association's
operations and profitability. Company shareholders do not have preemptive
rights, and therefore, if the Company is directed by the OTS or the FDIC to
issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Company.
Following completion of the Bank Conversion, the OCC will have the
authority to enforce such requirements against the Association.
Limitations on Dividends and Other Capital Distributions.
---------------------------------------------------------
FEDERAL SAVINGS ASSOCIATIONS. OTS regulations impose various
restrictions on savings associations with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. OTS regulations also prohibit a savings association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion.
Generally, savings associations, such as the Association, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Association
may pay dividends in accordance with this general authority. The Association
paid no dividends to the Company during 1996. At December 31, 1996, the
Association had total capital
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<PAGE> 35
of $71.2 million, of which $7.4 million was available for distribution to the
Corporation in accordance with OTS guidelines.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
Under a Dividend Limitation Agreement entered into with the Federal
Home Loan Bank Board (predecessor to the OTS) as of July 21, 1989, the Company
may not accept, nor may the Association pay, any dividend that would cause the
Association's regulatory capital to fall below its required level. If the
Association is in capital compliance, but not fully phased-in compliance, the
Dividend Limitation Agreement provides that dividends from the Association are
limited to 50% of the Association's cumulative net income for the prior eight
quarters (less dividends paid during such time). Because the Association is in
fully phased-in compliance with its capital requirement, it may pay dividends
under the Dividend Limitation Agreement equal to 100% of its cumulative net
income for the prior eight quarters (less dividends paid during such time). The
Dividend Limitation Agreement expires on July 22, 1999. To the extent that the
Dividend Limitation Agreement or the capital distribution regulation is more
restrictive than the other, the Association must comply with the more
restrictive limitations.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal, a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
NATIONAL BANKS. Following the Bank Conversion, the Association's
ability to pay dividends will not be subject to the limitations in the OTS
regulations but will instead be governed by the National Bank Act and OCC
regulations. Under such statute and regulations, all dividends by a national
bank must be paid out of current or retained net profits, after deducting
reserves for losses and bad debts. The National Bank Act further restricts the
payment of dividends out of net profits by prohibiting a national bank from
declaring a dividend on its shares of common stock until the surplus fund equals
the amount of capital stock or, if the surplus fund does not equal the amount of
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capital stock, until one-tenth of the bank's net profits for the preceding half
year in the case of quarterly or semi-annual dividends, or the preceding two
half-year periods in the case of annual dividends, are transferred to the
surplus fund. In addition, the prior approval of the OCC is required for the
payment of a dividend if the total of all dividends declared by a national bank
in any calendar year would exceed the total of its net profits for the year
combined with its net profits for the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the National Bank would be prohibited by federal
statute and the OCC's prompt corrective action regulations from making any
capital distribution if, after giving effect to the distribution, the National
Bank would be classified as "undercapitalized" under the OCC's regulations. See
"-- Prompt Corrective Action."
LIQUIDITY. All savings associations, including the Association, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what the Association includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" included in Exhibit 13. This liquid asset ratio requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings associations. At the present time,
the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1996, the Association was in compliance with
both requirements, with an overall liquid asset ratio of 9.51% and a short-term
liquid assets ratio of 6.97%.
National banks are not subject to any prescribed liquidity
requirements.
ACCOUNTING. An OTS policy statement applicable to all savings
associations clarifies and reemphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Association is in compliance
with these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
36
<PAGE> 37
The Association will be subject to similar requirements following
completion of the Bank Conversion.
QUALIFIED THRIFT LENDER TEST. All savings associations, including the
Association, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At December 31, 1996, the
Association met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
The QTL requirements and the penalties that may be imposed for failure
to comply therewith will not apply to the Association following completion of
the Bank Conversion.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Association, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by the Association. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required
37
<PAGE> 38
to devote additional funds for investment and lending in its local community.
The Association was examined for CRA compliance in December, 1995 and received a
rating of Outstanding.
Following completion of the Bank Conversion, the Association's
compliance with the CRA will be monitored by the OCC.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the
Association include the Company and any company which is under common control
with the Association. In addition, a savings association may not lend to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of most affiliates. The Association's subsidiaries are
not deemed affiliates, however; the OTS has the discretion to treat subsidiaries
of savings associations as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals. Following completion of the Bank Conversion, the Association will
be subject to virtually identical rules on transactions with affiliates and loss
to insiders.
Holding Company Regulation.
---------------------------
CURRENT REGULATION OF THE COMPANY. The Company is a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such, the
Company is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Association fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding
38
<PAGE> 39
company are more limited than are the activities authorized for a unitary or
multiple savings and loan holding company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan Company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
REGULATION OF THE COMPANY FOLLOWING THE BANK CONVERSION
General. Assuming consummation of the Bank Conversion, the Company, as
the sole stockholder of the Association, will become a bank holding company and
register as such with the FRB and deregister with the OTS as a savings and loan
holding company. Bank holding companies are subject to comprehensive regulation
by the FRB under the BHCA, and the regulations of the FRB. As a bank holding
company, the Company will be required to file reports with the FRB and such
additional information as the FRB may require, and will be subject to regular
inspections by the FRB. The FRB also has extensive enforcement authority over
bank holding companies, including, among other things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
As a savings and loan holding company, the Company is generally not
subject to any activity restrictions, but as a bank holding company will be
subject to the more restrictive activity limitations imposed on bank holding
companies. The BHCA prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution (such as the Association), mortgage company,
finance company, credit card company or factoring company; performing certain
39
<PAGE> 40
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The scope of permissible activities may be
expanded from time to time by the FRB and proposals to expand such activities
are pending. Such activities may also be affected by federal legislation.
Interstate Banking and Branching. In 1994, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was enacted
to ease restrictions on interstate banking. Effective September 29, 1995, the
Riegle-Neal Act allows the FRB to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other than such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The FRB may not approve the
acquisition of a bank that has not been in existence for the minimum time period
(not exceeding five years) specified by the statutory law of the host state. The
Riegle-Neal Act also prohibits the FRB from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the Riegle-Neal Act.
Additionally, beginning on June 1, 1997, the federal banking agencies
will be authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks opts out of the Riegle-Neal Act by adopting a law
after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997
which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. A state may also permit such
transactions before such time by enacting authorizing legislation. Interstate
acquisitions of branches will be permitted only if the law of the state in which
the branch is located permits such acquisitions. Interstate mergers and branch
acquisitions will also be subject to the nationwide and statewide insured
deposit concentration amounts described above.
The Riegle-Neal Act authorizes the OCC and the Federal Deposit
Insurance Corporation to approve interstate branching de novo by national and
state banks, respectively, only in states which specifically allow for such
branching. The Riegle-Neal Act also requires the appropriate federal banking
agencies to prescribe regulations by June 1, 1997 which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production. These regulations must include guidelines to
ensure that interstate branches operated by an out-of-state bank in a host state
are reasonably helping to meet the credit needs of the communities which they
serve. The State of Ohio has not yet authorized interstate merger transactions
or de novo interstate branching.
40
<PAGE> 41
As a federal thrift institution, the Association, subject to certain
conditions, has nationwide branching authority.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that its net income
for the past year is sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the holding company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
Capital Requirements. The FRB has established capital requirements for
bank holding companies that generally parallel the capital requirements for
national banks and federal thrift institutions. As a thrift holding company, the
Company is not subject to any minimum capital requirements.
FEDERAL SECURITIES LAW. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain non- interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1996, the Association was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "--Liquidity."
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<PAGE> 42
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
As a national bank, the Association will be required to become a member
of the Federal Reserve System and subscribe for stock in the Federal Reserve
Bank of Cleveland in an amount equal to 3% of the National Bank's paid in
capital and surplus (an additional 3% will be subject to call by the FRB of it).
The Association will continue to be subject to the reserve requirements to which
it is presently subject under FRB regulations.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB
of Cincinnati, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Cincinnati. At December 31, 1996, the Association had $17.5
million in FHLB stock, which was in compliance with this requirement. In past
years, the Association has received substantial dividends on its FHLB stock.
Over the past five calendar years such dividends have averaged 5.71% and were
6.96% for calendar year 1996. The Association currently intends to remain a
member of the FHLB of Cincinnati following completion of the Bank Conversion.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Association's FHLB stock may result in a corresponding
reduction in the Association's capital.
For the year ended December 31, 1996, dividends paid by the FHLB of
Cincinnati to the Association totaled $1,062,000, which constitute a $146,000
increase from the amount of dividends received in calendar year 1995. The
$300,125 dividend received for the quarter ended December 31, 1996, reflects an
annualized rate of 7%, consistent with the rate for calendar 1995.
FEDERAL AND STATE TAXATION. Prior to the enactment of recent
legislation (discussed below), savings associations such as the Association that
met certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual
42
<PAGE> 43
additions thereto which could, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" was computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) could be computed under either the experience method or the percentage
of taxable income method (based on an annual election).
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Association, to calculate their bad debt reserve for
federal income tax purposes. As a result, large thrifts such as the Association
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the specific charge-off method for post-1987 tax years.
The legislation also requires thrifts to account for bad debts for federal
income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995. The recapture will occur over a six-year
period, the commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. The management of the Company does not believe
that the legislation will have a material impact on the Company or the
Association.
In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Association, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996, the Association's Excess for tax purposes
totaled approximately $3.6 million.
The Association and its subsidiaries file consolidated federal income
tax returns on a fiscal year basis using the accrual method of accounting. The
Company intends to file consolidated federal income tax returns with the
Association and its subsidiaries. Savings associations, such as the Association,
that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their taxable income for
purposes of computing the
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<PAGE> 44
percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Association and its consolidated subsidiaries have been audited by
the IRS with respect to consolidated federal income tax returns through December
31, 1992. With respect to years examined by the IRS, either all deficiencies
have been satisfied or sufficient reserves have been established to satisfy
asserted deficiencies. In the opinion of management, any examination of still
open returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Association) would not result in a deficiency which could have
a material adverse effect on the financial condition of the Association and its
consolidated subsidiaries.
Ohio Taxation. As a federally chartered savings and loan association,
the Association 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
exempted assets. The resultant net worth is taxed at a rate of 1.5% for 1996.
Certain subsidiaries in the consolidated group will be subject to Ohio
franchise tax based on the greater of the tax on net worth or the tax on net
income, subject to various adjustments and varying rates. In addition, the
subsidiaries will be subject to state taxes in other states in which they do
business. Local taxes on property and income will also be imposed in certain
jurisdictions.
For additional information regarding taxation, see Note 18 of the Notes
to the Consolidated Financial Statements in Exhibit 13.
EMPLOYEES
- ---------
At December 31, 1996, the Association had a total of 327 employees
including 120 part-time employees. Also at December 31, 1996, MCi had a total of
190 employees including 22 part-time employees. None of the employees of the
Association or MCi are represented by a collective bargaining group. Management
considers its employee relations to be excellent.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
- ----------------------------------------
The following information as to the business experience during the last
five years is supplied with respect to executive officers of and Company who do
not serve on the Company's Board of Directors.
JAMES J. LITTLE. Mr. Little, age 34, is Executive Vice President and
Chief Financial Officer of the Company. Prior to serving in his current
position, Mr. Little was President and Chief Executive Officer of Falls Savings
Bank. Mr. Little is a certified public accountant.
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<PAGE> 45
ITEM 2. PROPERTIES
- ------------------
OFFICES. The following tables set forth information as of December 31,
1996 with respect to the Company's and Association's offices.
<TABLE>
<CAPTION>
Net Book Value
of Land
Buildings,
Year Owned Estimated Improvements,
Originally or Square Feet of Furniture and Fixtures
Location Opened Leased Space (in Thousands)
- ------------------------------------- ------------ ---------- ---------------- ---------------------------
<S> <C> <C> <C> <C>
Corporate Office
- ----------------
135 E. Liberty Street 1970 Owned 11,000 $ 587
Wooster, Ohio
Branch Offices
- --------------
1812 Cleveland Road 1962 Owned 3,200 220
Wooster, Ohio
62 Center Street 1979 Owned 2,000 172
Seville, Ohio
72 Public Square 1972 Owned 3,000 234
Medina, Ohio
132 W. Main 1967 Owned 4,900 303
Ashland, Ohio
1277 Ashland Road 1980 Owned 2,600 482
Mansfield, Ohio
330 W. High Street 1984 Leased 1,200 1
Orrville, Ohio
890 N. Court Street 1990 Leased 2,300 32
Medina, Ohio
136 S. Main St. 1991 Owned 15,468 272
Mt. Vernon, Ohio
901 Coshocton Ave. 1991 Owned 1,467 306
Mt. Vernon, Ohio
241 W. Main St. 1991 Owned 2,893 87
Loudonville, Ohio
1468 Lexington Avenue 1992 Owned 3,600 544
Mansfield, Ohio
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
Net Book Value
of Land
Buildings,
Year Owned Estimated Improvements,
Originally or Square Feet of Furniture and Fixtures
Location Opened Leased Space (in Thousands)
- ------------------------------------- ------------ ---------- ---------------- ---------------------------
<S> <C> <C> <C> <C>
2281 W. Fourth Street 1993 Owned 2,700 379
Ontario, Ohio
1423 Mifflin Avenue 1987 Owned 978 179
Ashland, Ohio
100 Park Avenue West 1994 Leased 3,400 364
Mansfield, Ohio
543 Riffel Road 1995 Leased 2,500 189
Wooster, Ohio
215 Smithville Road 1996 Leased 2,450 200
Orrville, Ohio
Limited Service Office
- ----------------------
324 S. Main St. 1991 Owned 478 80
Mt. Vernon, Ohio
329 S. Market St. 1994 Owned 500 337
Wooster, Ohio
1001 Leisure Lane 1995 Leased 900 ---
Medina, Ohio
Administrative Offices
- ----------------------
127 E. Liberty Street 1988 Owned 15,000 1,602
Wooster, Ohio
Corporate Office-Mobile Consultants, Inc.
- -----------------------------------------
111 Glamorgan Street 1996 Owned 33,000 1,340
Alliance, Ohio
</TABLE>
See also Note 9 to Notes to Consolidated Financial Statements in
Exhibit 13.
COMPUTER EQUIPMENT. The Association utilizes hardware and software
housed in its administrative offices. At December 31, 1996, the system had a net
book value of $373,000. In addition, MCi has computer hardware and software with
a net book value of $261,000 on December 31, 1996.
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<PAGE> 47
ITEM 3. LEGAL PROCEEDINGS
-----------------
In the ordinary course of their respective businesses, the Company, the
Association and MCi are parties to various legal proceedings. In the opinion of
management of the Company, after consideration of advice from outside litigation
counsel, the ultimate resolution of any legal proceedings outstanding as of
December 31, 1996 will not have a material adverse effect on the Company's
consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three months ended December 31,
1996.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The information under the caption "Market Information" in the portions
of the Company's Annual Report to Stockholders for the year ended December 31,
1996, included as Exhibit 13 to this Report, is herein incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information under the caption "Selected Consolidated Financial
Data" in the portions of the Company's Annual Report to Stockholders for the
year ended December 31, 1996, included as Exhibit 13 to this Report, is herein
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the portions of the
Company's Annual Report to Stockholders for the year ended December 31, 1996,
included as Exhibit 13 to this Report, is herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The consolidated financial statement and notes thereto contained in the
portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1996, included as Exhibit 13 to this Report, are herein
incorporated by reference.
The independent auditor's report of Deloitte & Touche LLP dated January
26, 1996 is included as Exhibit 99 to this Report and is herein incorporated by
reference.
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<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
The information required by Item 304 of Regulation S-K was previously
filed as part of the Company's Current Report on Form 8-K reporting the event of
August 20, 1996 filed on August 27,1996, as amended on Form 8-K/A filed on
September 9, 1996.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information concerning Executive Officers of the Company is contained
under the heading "Executive Officers Who Are Not Directors" on page 43 herein.
Information concerning Directors of the Registrant is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which was filed with the SEC on March
14, 1997. Information contained under the headings "Compensation Committee
Report on Executive Compensation" and "Performance Graph" included in the Proxy
Statement pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically
not incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which was filed with the SEC on March
14, 1997. Information contained under the headings "Compensation Committee
Report on Executive Compensation" and "Performance Graph" included in the Proxy
Statement pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically
not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which was filed with the SEC on March 14, 1997. Information contained under the
headings "Compensation Committee Report on Executive Compensation" and
"Performance Graph" included in the Proxy Statement pursuant to Items 402(k) and
402(l) of Regulation S-K are specifically not incorporated by reference herein.
48
<PAGE> 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which was filed
with the SEC on March 14, 1997. Information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" included in the Proxy Statement pursuant to Items 402(k) and 402(l) of
Regulation S-K are specifically not incorporated by reference herein.
49
<PAGE> 50
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a)(1) Consolidated Financial Statements:
---------------------------------
The following information appears in the portions of the Company's
Annual Report to Stockholders for the year ended December 31, 1996, included as
Exhibit 13 to this Report:
<TABLE>
<CAPTION>
PAGES IN
THIS REPORT
-----------
<S> <C>
Independent Auditors' Report............................................................................. __
Consolidated Statements of Financial Condition
December 31, 1996 and 1995............................................................................. __
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994........................................................... __
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994........................................................... __
Consolidated Statement of Cash Flows
Years Ended December 31, 1996, 1995 and 1994........................................................... __
Notes to Consolidated Financial Statements............................................................ __-__
</TABLE>
(a)(2) Financial Statement Schedules:
-----------------------------
Financial statement schedules have been omitted because the required
information is contained in the consolidated financial statements and notes
thereto, or because such schedules are not required or applicable.
50
<PAGE> 51
(a)(3) Exhibits
--------
<TABLE>
<CAPTION>
REGULATION
S-K EXHIBIT REFERENCE TO
NUMBER PRIOR FILING OR
- ------------------ EXHIBIT NUMBER
DOCUMENT ATTACHED HERETO
------------------------------------------------------- ---------------
<S> <C> <C>
3(i) Articles of Incorporation 3(i)
3(ii) By-Laws *
4 Instruments defining the rights of security holders, See also Exhibit 3
including debentures **
9 Voting Trust Agreement None
10 Material contracts
1987 Stock Option and Incentive Plan ***
Management Incentive Compensation Plan ****
Non-Employee Director Stock Option Plan *****
1997 Omnibus Incentive Plan ******
Employment agreement of G. Clark 10a
Employment agreement of L. D. Douce 10b
Employment agreement of J. Little 10c
Employment agreement of R. James 10d
11 Statement regarding computation of per share earnings None
12 Statement regarding computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter regarding change in certifying accountants Not required
18 Letter regarding change in accounting principles None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to vote of None
security holders
23 Consents of Experts and Counsel 23.1 and 23.2
25 Power of Attorney Not required
27 Financial Data Schedule 27
</TABLE>
51
<PAGE> 52
<TABLE>
<S> <C> <C>
99 Additional Exhibits -- report of predecessor 99
independent accountants
</TABLE>
* Filed as exhibits to the Company's Registration Statement on Form S-2
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on September 28, 1992 (Registration No. 33-50664). All of such
previously filed document is hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
** The Company agrees to file with the Securities and Exchange
Commission, if requested, a copy of the indenture relating to the Company's
$40,500,000 of 9.125% Subordinated Notes due March 15, 2004.
*** Filed as Exhibit 4 to the Company's Registration Statement on Form
S-8 under the Securities Act of 1933, filed with the Securities and Exchange
Commission on May 29, 1992 (Registration No. 33-48246). All of such previously
filed document is hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
**** Filed as Exhibit 10 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992, filed with the Securities and
Exchange Commission on March 26, 1993 (File No. 0-17894). All of such previously
filed document is hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
***** Attached as Exhibit A to the Company's definitive proxy
statement, filed with the Securities and Exchange Commission on March 18, 1994,
relating to its Annual Meeting of Stockholders held on April 21, 1994 (File No.
0-17894). All of such previously filed document is hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
****** Attached as Appendix A to the Company's definitive proxy
statement. Filed with the Securities and Exchange Commission on March 14, 1997,
relating to its Annual Meeting of Stockholders to be held on April 16, 1997. All
of such previously filed document is hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
-------------------
On January 8, 1997 the Company filed a Current Report on Form 8-K
reporting the issuance of a press release by the Company announcing the
execution of a definitive agreement to acquire Summit Bancorp.
52
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRSTFEDERAL FINANCIAL SERVICES CORP
Date: March 25, 1997 By: /s/ James J. Little
--------------- ----------------------------------------
JAMES J. LITTLE, Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Gary G. Clark By: /s/ L. Dwight Douce
------------------------------------ ------------------------------------
GARY G. CLARK, Chairman of the Board, L. DWIGHT DOUCE, Executive Vice
President and Chief Executive Officer President, Secretary, Treasurer and Director
Date: March 25, 1997 Date: March 25, 1997
------------------------------------ ------------------------------------
By: /s/ Robert F. Belden By: /s/ Gust B. Geralis
------------------------------------ ------------------------------------
ROBERT F. BELDEN, Director GUST B. GERALIS, Director
Date: March 25, 1997 Date: March 25, 1997
------------------------------------ ------------------------------------
By: /s/Steven N. Stein By: /s/ Richard E. Herald
------------------------------------ ------------------------------------
STEVEN N. STEIN, Director RICHARD E. HERALD, Director
Date: March 25, 1997 Date: March 25, 1997
------------------------------------ ------------------------------------
By: /s/ R. Victor Dix By: /s/ Daniel H. Plumly
------------------------------------ ------------------------------------
R. VICTOR DIX, Director DANIEL H. PLUMLY, Director
Date: March 25, 1997 Date: March 25, 1997
------------------------------------ ------------------------------------
</TABLE>
<PAGE> 1
Exhibit 3(i)
CURRENT
ARTICLES OF INCORPORATION
AS AMENDED
OF
FIRSTFEDERAL FINANCIAL SERVICES CORP.
The undersigned, desiring to form a corporation for profit under
Chapter 1701 of the Ohio Revised Code, does hereby certify:
FIRST: The name of the Corporation is FirstFederal Financial Services
Corp.
SECOND: The place in Ohio where the principal office of the corporation
is located is 135 E. Liberty Street, in the City of Wooster, Wayne County.
THIRD: The purpose for which the Corporation is formed is to become a
savings and loan holding company and to engage in any lawful act or activity for
which corporations may be formed under Chapter 1701 of the Ohio Revised Code.
FOURTH: The aggregate number of shares of all classes of capital stock
which the Corporation has authority to issue is six million shares of which five
million shares are to be shares of common stock, $1.00 par value per share, and
of which one million are to be shares of serial preferred stock, without par
value per share. The shares may be issued by the Corporation from time to time
as approved by the Board of Directors of the Corporation without the approval of
the stockholders except: as otherwise provided in these Articles of
Incorporation. The consideration for the issuance of the shares shall be paid to
or received by the Corporation in full before their issuance and shall not be
less than the par value per share. The consideration for the issuance of the
shares may be paid in whole or in part, in real property, in tangible or
intangible personal property, in labor or services actually performed for the
Corporation or in its formation, or as otherwise permitted by Ohio law. Except
as otherwise permitted by Ohio law, the judgment of the Board of Directors or
the stockholders as the case may be as to the value of such consideration shall
be conclusive. Upon payment of such consideration such shares shall be deemed to
be fully paid and nonassessable. In the case of a stock dividend, the part of
the surplus of the Corporation which is transferred to stated capital upon the
issuance of shares as a stock dividend shall be deemed to be the consideration
for their issuance.
<PAGE> 2
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative rights, preferences
and limitations of the shares of each class and series (if any) of capital
stock, are as follows:
A. COMMON STOCK. Except as provided in these Articles of Incorporation,
the holders of the common stock shall exclusively possess all voting power. Each
holder of shares of common stock shall be entitled to one vote for each share
held by such holders. There shall be no cumulative voting rights in the election
of directors.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when and as
declared by the Board of Directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event, the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, including the payment of all
fees, taxes and other expenses incidental thereto, to receive the remaining
assets of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative rights,
preferences and limitations as, and shall be identical in all respects with, all
the other shares of common stock of the Corporation.
B. SERIAL PREFERRED STOCK. Except as provided in these Articles of
Incorporation, the Board of Directors of the Corporation is authoriZed to
further amend these Articles to provide for the specific terms of serial
preferred stock to be issued in series and to fix and state the rights,
preferences, limitations and relative, participating, optional or other special
rights of the shares of each such series, and the qualifications, limitations or
restrictions thereof. The terms of shares of different series shall be identical
except as to the following rights and preferences, as to which there may be
variations between different series:
1. the distinctive serial designation and the number of shares
constituting such series; and
-2-
<PAGE> 3
2. the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to dividends; and
3. whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon which such
shares may be redeemed; and
4. the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
5. whether the shares of such series shall be entitled to the benefits
of a sinking or retirement fund to be applied to the purchase or redemption of
such shares, and, if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be redeemed
or purchased through the application of such funds; and
6. whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series of
the same or any other class or classes of stock of the Corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such conversion
or exchange; and
7. restrictions, if any, on the issuance of shares of the same series
or any other class or series; and
8. any other designations, preferences, limitations or rights that are
now or hereafter permitted by the laws of the State of Ohio and are not
inconsistent with the provisions of this Paragraph B.
Each share of each series of serial preferred stock shall have the same
relative rights, preferences and limitations as, and shall be identical in all
respects with, all the other shares of capital stock of the Corporation of the
same series.
FIFTH: The Corporation shall indemnify to the full extent then
permitted by law a director or a former director, and may, at the discretion of
the Board of Directors, indemnify to the full extent then permitted by law, an
officer or employee or former officer or employee, against expenses actually and
reasonably incurred by him in connection with the defense of any pending or
threatened action, suit, or proceeding, criminal or civil, to which he is or
may be made a party by reason of being or having been such director, officer or
employee.
-3-
<PAGE> 4
The Corporation may, to the full extent then permitted by law, purchase
and maintain insurance on behalf of or for any person described above against
any liability asserted against and incurred by any such person in any such
capacity or arising out of his status as such, whether or not the corporation
would have the power to indemnify such person against such liability.
SIXTH: No stockholder of the Corporation shall have, as a matter of
right, the pre-emptive right to purchase or subscribe for shares of any class,
now or hereafter authorized, or to purchase or subscribe for securities or other
obligations convertible into or exchangeable for such shares or which by
warrants or otherwise entitle the holders thereof to subscribe for or purchase
any such shares.
SEVENTH: The Corporation may from time to time, pursuant to
authorization by the Board of Directors of the Corporation and without action by
the stockholders, purchase or otherwise acquire shares of any class, bonds,
debentures, notes, scrip, warrants, obligations, evidences of indebtedness, or
other securities of the Corporation in such manner, upon such terms, and in such
amounts as the Board of Directors shall determine.
EIGHTH: A. Notwithstanding any other provision of these Articles or the
Code of Regulations of the Corporation, any action required to be taken or which
may be taken at any annual or special meeting of stockholders of the Corporation
may be taken without a meeting, if a consent in writing, setting forth the
action so taken, shall be signed by all of the shareholders of the Corporation
entitled to vote thereon.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the chairman of the Board, the
president, the Board of Directors by action at a meeting or a majority of the
Board of Directors acting without a meeting, and shall be called by the chairman
of the Board, the president, or the secretary upon the written request of the
holders of 50% of all the shares outstanding and entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered at the principal executive office of the Corporation
addressed to the president or the secretary.
C. Meeting of stockholders may be held within or without the State of
Ohio, as the Code of Regulations may provide.
-4-
<PAGE> 5
NINTH: The number of directors of the Corporation shall be such number,
not less than 6 nor more than 15 (exclusive of directors, if any, to be elected
by holders of preferred stock of the Corporation, voting separately as a class),
as shall be provided from time to time by the Board of Directors, provided that
no decrease in the number of directors shall have the effect of shortening the
term of any incumbent director, and provided further that no action shall be
taken to decrease or increase the number of directors from time to time unless
at least two-thirds of the directors then in office shall concur in said action.
Vacancies in the Board of Directors of the Corporation and newly created
directorships shall be filled by a vote of two-thirds of the directors then in
office, whether or not a quorum, and any director so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
the class to which the director has been chosen expires and when the director's
successor is elected and qualified. Directors shall be required to own at least
100 shares of the Corporation's common stock. Directors need not be residents of
any particular state, country or other jurisdiction.
The Board of Directors of the Corporation shall be divided into two
classes if the Board of Directors consists of eight or fewer members, or into
three classes if the Board of Directors consists of nine or more members. Such
classes shall be as nearly equal in number as the then total number of directors
constituting the entire Board of Directors shall permit, and shall consist of no
fewer than three members each. The Board of Directors of the Corporation shall
initially consist of eight members, who shall be divided into two classes.
Should the number of directorships be increased to nine or more, the directors
of the Corporation shall be divided into three classes: the first class, the
second class and the third class. Each director shall serve for a term ending on
the third annual meeting following the annual meeting at which such director was
elected; provided, however, that the directors first elected to the first class
shall serve for a term ending upon the election of directors at the first annual
meeting next following the end of the fiscal year ending December 31, 1989, and
the directors first elected to the second class shall serve for a term ending
upon the election of directors at the second annual meeting next following the
end of the fiscal year ending December 31, 1990, and the directors first elected
to the third class shall serve for a term ending upon the election of directors
at the third annual meeting next following the end of the fiscal year ending
December 31, 1991. Thereafter at each annual meeting of stockholders, directors
of classes the terms of which expire at such annual meeting shall be elected for
terms of three years. If the number of classes of directors has been increased
or decreased in the year prior to an annual meeting of stockholders, the terms
of the directors who are to be elected at such annual meeting shall be
determined by resolution of the Board of Directors. A director whose term shall
expire at any annual meeting shall continue to serve until such time as his
successor shall have been duly elected and shall have qualified unless his
position on the Board of Directors shall have been abolished by action taken to
reduce the size of the Board of Directors prior to said meeting.
-5-
<PAGE> 6
Should the number of directors of the Corporation be increased, the
directorship(s) added shall be allocated among classes as appropriate so that
the number of directors in each class is as specified in the immediately
preceding paragraph. Should the number of directors of the Corporation be
reduced, the directorship(s) eliminated shall be allocated among the classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph. The Board of Directors shall designate, by the
name of the incumbent, the position to be abolished.
The Board of Directors of the Corporation shall be divided into two
classes if the Board of Directors consists of eight or fewer members, or into
three classes if the Board of Directors consists of nine or more members. Such
classes shall be as nearly equal in number as the then total number of directors
constituting the entire Board of Directors shall permit, and shall consist of no
fewer than three members each. The Board of Directors of the Corporation shall
initially consist of eight members, who shall be divided into two classes.
Should the number of directorships be increased to nine or more prior to the
first annual meeting of stockholders of the Corporation, at the first annual
meeting of stockholders, directors of the first class shall be elected to hold
office for a term expiring at the first annual meeting thereafter, directors of
the second class shall be elected to hold office for a term expiring at the
second annual meeting thereafter and directors of the third class shall be
elected to hold office for a term expiring at the third annual meeting
thereafter. Thereafter, at each annual meeting of stockholders, directors of
classes the terms of which expire at such annual meeting shall be elected for
terms of three years. If the number of classes of directors has been increased
or decreased in the year prior to an annual meeting of stockholders, the terms
of the directors who are to be elected at such annual meeting shall be
determined by resolution of the Board of Directors. A director whose term shall
expire at any annual meeting shall continue to serve until such time as his
successor shall have been duly elected and shall have qualified unless his
position on the Board of Directors shall have been abolished by action taken to
reduce the size of the Board of Directors prior to said meeting.
Should the number of directors of the Corporation be increased, the
directorship(s) added shall be allocated among classes as appropriate so that
the number of directors in each class is as specified in the immediately
preceding paragraph, provided that, should the number of the directorships be
increased to nine or more, the Board of Directors shall be divided into three
classes. Should the number of directors of the Corporation be reduced the
directorship(s) eliminated shall be allocated among the classes as appropriate
so that the number of directors in each class is as specified in the immediately
preceding paragraph. The Board of Directors shall designate, by the name of the
incumbent, the position to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director.
TENTH: Notwithstanding any other provision of these Articles or the Code
of Regulations of the Corporation, no director may be removed except for cause,
and then, any director, all the directors of a particular class or the entire
Board of Directors
-6-
<PAGE> 7
of the Corporation may be removed only by the affirmative vote of the holders of
a majority of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for that
purpose. In the case of a removal of a director by the stockholders, a new
director may be elected at the same meeting of stockholders to hold office for
the remainder of the term of the removed director. Failure by the stockholders
to fill the unexpired term of a removed director at such meeting of stockholders
shall be deemed to create a vacancy in the board of directors, which shall be
filled by the Board of Directors as provided in Article Ninth.
ELEVENTH: The provisions of this Article Eleventh shall become effective
upon First Federal Savings and Loan Association of Wooster (the "Association")
becoming a majority-owned subsidiary of the Corporation. In the event that
thereafter the Association (or any successor institution) ceases to be a
majority-owned subsidiary of the Corporation, this Article Eleventh shall
thereupon cease to be effective.
Subsection 1. Restrictions on Acquisitions of Control and Offers
to Acquire Control.
For a period of five years from the effective date of the
conversion of First Federal Savings and Loan Association of
Wooster from mutual to stock form, no Person (as defined in
Article Twelfth hereof) shall, directly or indirectly, acquire
Control of the Corporation, or make any Offer to acquire Control
of the Corporation, unless such acquisition or Offer has received
the prior approval of at least two-thirds of the directors then in
office at a duly constituted meeting of the board of directors of
the Corporation called for such purpose. The terms "Control" and
"Offer" as used in this Article Eleventh are defined in Subsection
4 hereof. The term "Person" as used in this Article Eleventh is
defined in Article Twelfth hereof.
Subsection 2. Regulatory Approval Required for Acquisition of
Control at any Time.
No Person shall, directly or indirectly, acquire Control of
the Corporation at any time without obtaining prior thereto all
federal regulatory approvals required under the Change in Savings
and Loan Control Act (the "Control Act") and the Savings and Loan
Holding Company Act (the "Holding Company Act"), or any successor
provisions of law, and in the manner provided by all applicable
regulations of the Federal Savings and Loan Insurance Corporation
(the "FSLIC"). In the event that Control is acquired without
obtaining all such regulatory approvals, such acquisition shall
constitute a violation of this Article Eleventh and the
Corporation shall be entitled to institute an action to enforce
this Article Eleventh. The term "Voting Shares" as used in this
Article Eleventh is defined in Article Twelfth hereof.
-7-
<PAGE> 8
Subsection 3. Excess Shares.
In the event that Control of the Corporation is acquired in violation of
this Article Eleventh, all Voting Shares owned by the Person so acquiring
Control in excess of the number of shares the beneficial ownership of which is
deemed under Subsection 4 hereof to confer Control of the Corporation shall be
considered from and after the date of their acquisition by such Person to be
"excess shares" for purposes of this Article Eleventh. Such excess shares shall
thereafter no longer (i) be entitled to vote on any matter, (ii) be entitled to
take other stockholder action, (iii) be entitled to be counted in determining
the total number of outstanding shares for purposes of any matter involving
stockholder action, or (iv) be entitled to receive dividends thereon. The board
of directors shall have the right to appoint an independent trustee for the
purpose of having such excess shares sold on the open market or otherwise. The
proceeds from the sale by the trustee of such excess shares shall be paid (i)
first, to the trustee in an amount equal to the trustee's reasonable fees and
expenses, (ii) second, to the beneficial owner of such excess shares in an
amount up to such owner's federal income tax basis in such excess shares, and
(iii) third, to the Corporation as to any remaining balance.
Subsection 4. Certain Definitions.
For purposes of this Article Eleventh the following terms shall be
defined as follows:
(A) The term "Control" shall mean the sole or shared power to
vote or to direct the voting of, or to dispose or to direct the
disposition of, ten percent or more of the Voting Shares; provided, that
the solicitation, holding and voting of proxies obtained by the board of
directors of the Corporation pursuant to a solicitation under Regulation
14A of the General Rules and Regulations under the Exchange Act shall
not constitute "Control."
(B) The term "Offer" shall mean every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or
invitation for tender of, Voting Shares.
-8-
<PAGE> 9
Subsection 5. Inapplicability to Public Offering or Employee Stock
Benefit Plans.
This Article Eleventh shall not apply to an acquisition or Offer
to acquire securities of the Corporation (i) by underwriters in
connection with a public offering of such securities, or (ii) by an
employee stock purchase plan or other employee benefit plan of the
Corporation or any of its subsidiaries.
Subsection 6. References to FSLIC.
In the event that the accounts of the Association (or any
successor institution) become insured by the Federal Deposit Insurance
Corporation ("FDIC") in lieu of the FSLIC, all references in this
Article Eleventh to the FSLIC shall be deemed to refer to the FDIC, and
related references to the Control Act and the Holding Company Act shall
be deemed to be references to applicable statutes relating to banks the
accounts of which are insured by the FDIC.
TWELFTH:
Subsection 1. Rights of Stockholders.
The affirmative vote of the holders of two-thirds or more of the
outstanding Voting Shares, voting as a single class, shall be required
for the approval or authorization of any Business Combination, provided,
however, that the two-thirds voting requirement shall not be applicable
and such Business Combination shall be approved by the vote required by
law or by any other provision of these Articles of Incorporation if
either:
(1) The Business Combination is approved by the board of
directors of the Corporation by the affirmative vote of at least
two-thirds of the Continuing Directors, or
(2) All of the following conditions are satisfied:
(a) The aggregate amount of the cash and the fair market
value (as determined by two-thirds of the Continuing Directors)
of the property, securities or other consideration to be
received per share of capital stock of the Corporation in the
Business Combination by the holders of capital stock of the
Corporation, other than the Related Person involved in the
Business Combination, shall not be less than the highest of (i)
the highest per share price (including brokerage commissions,
soliciting dealers' fees, and dealer-management
-9-
<PAGE> 10
compensation, and with appropriate adjustments for
recapitalizations, stock splits, stock dividends and like
transactions and distributions) paid by such Related Person in
acquiring any of its holdings of such class or series of capital
stock, (ii) the highest per share Market Value of such class or
series of capital stock within the 12- month period immediately
preceding the date the proposal for such Business Combination
was first publicly announced or (iii) the book value per share
of such class or series of capital stock, determined in
accordance with generally accepted accounting principles, as of
the last day of the month immediately preceding the date the
proposal for such Business Combination was first publicly
announced; and
(b) The consideration to be received in such Business
Combination by holders of capital stock other than the Related
Person involved shall, except to the extent that a stockholder
agrees otherwise as to all or part of the shares which he or she
owns, be in the same form and of the same kind as the
consideration paid by the Related Person in acquiring capital
stock already owned by it, provided, however, if the Related
Person has paid for shares of capital stock with varying forms
of consideration, the form of consideration for shares of
capital stock acquired in the Business Combination by the
Related Person shall be either cash or the form used to acquire
the largest number of shares of capital stock previously
acquired by it; and
(c) A proxy statement responsive to the requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and regulations promulgated thereunder, whether or not the
Corporation is then subject to such requirements, shall be
mailed to the stockholders of the Corporation for the purpose of
soliciting stockholder approval of such Business Combination and
shall contain in a prominent place at the front thereof (i) any
recommendations as to the advisability (or inadvisability) of
the Business Combination which the Continuing Directors may
choose to state, and (ii) the opinion of a reputable investment
banking firm selected by the Continuing Directors as to the
fairness of the terms of such Business Combination, from a
financial point of view, to the public stockholders (other than
the Related Person) of the Corporation.
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<PAGE> 11
Subsection 2. Definitions and Terms.
(1) Definitions.
For purposes of this Article Twelfth, the following terms shall
be defined as follows:
(a) The term "Business Combination" shall mean (i) any
merger or consolidation of the Corporation or a Subsidiary with
a Related Person, (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition, in a single transaction
or series of related transactions, other than in the ordinary
course of business (as deter- mined by two-thirds of the
Continuing Directors) to or with a Related Person of any assets
of the Corporation or a Subsidiary having an aggregate fair
market value (as determined by two-thirds of the Continuing
Directors) of $750,000 or more, (iii) the issuance or transfer
by the Corporation of any Voting Shares or securities
convertible into such shares (other than by way of pro rata
distribution to all stockholders) to a Related Person, (iv)
any recapitalization, merger or consolidation that would have
the effect of increasing the voting power of a Related Person,
(v) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation or a Subsidiary proposed,
directly or indirectly, by or on behalf of a Related Person,
(vi) any merger or consolidation of the Corporation with another
Person proposed, directly or indirectly, by or on behalf of a
Related Person unless the entity surviving or resulting from
such merger or consolidation has a provision in its certificate
or articles of incorporation, charter or similar governing
instrument, which is substantially identical to this Article
Twelfth, and (vii) any agreement, contract or other arrangement
or understanding providing, directly or indirectly, for any of
the transactions described in this Subsection 2(1)(a).
(b) The term "Related Person" shall mean any individual,
partnership, corporation, trust or other Person which, together
with its "affiliates" and "associates," as defined in Rule 12b-2
of the General Rules and Regulations under the Exchange Act as
in effect on February 1, 1989, and together with any other
individual, partnership, corporation, trust or other Person with
which it or they have any agreement, contract or other
arrangement or understanding with respect to acquiring, holding,
voting or disposing of Voting Shares, "beneficially owns"
(within the meaning of Rule
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<PAGE> 12
13d-3 under the Exchange Act as in effect on said date) an
aggregate of ten percent or more of the outstanding Voting
Shares of the Corporation. A Related Person, its affiliates and
associates and all such other individuals, partnerships,
corporations and other Persons with whom it or they have any
such agreement, contract or other arrangement or understanding
shall be deemed a single Related Person for purposes of this
Article Twelfth, provided, however, that the members of the
board of directors of the Corporation shall not be deemed to be
associates or otherwise to constitute a Related Person solely by
reason of their board membership. A person who is a Related
Person as of either (i) the time any definitive agreement
relating to a Business Combination is entered into, or (ii) the
record date for the determination of stockholders entitled to
notice of and to vote on a Business Combination, or (iii)
immediately prior to the consummation of a Business Combination
shall be deemed a Related Person for purposes of this Article
Twelfth.
(c) The term "Continuing Director" shall mean any member of
the board of directors of the Corporation who is unaffiliated
with the Related Person referred to in Subsection 2(1)(a) of
this Article Twelfth and was a member of the board of directors
prior to the time that such Related Person became a Related
Person, and any successor of a Continuing Director who is
unaffiliated with such Related Person and is recommended to
succeed a Continuing Director by a majority of the Continuing
Directors.
(d) The term "Person" shall have the same meaning as defined
by Section 408 (a) (1) (G) of the National Housing Act as in
effect on February 1, 1989 .
(e) The term "Subsidiary" shall mean any corporation or
other entity of which the Person in question owns directly or
indirectly, not less than 50 percent of any class of equity
securities.
(f) The term "Voting Shares" shall mean any outstanding
shares of capital stock of the Corporation entitled to vote
generally in the election of directors.
(g) The term "Entire Board of Directors" shall mean the
total number of directors which the Corporation would have if
there were no vacancies.
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<PAGE> 13
(h) The term "Market Value" shall mean the average of the
high and low quoted sales price on the date in question (or, if
there is no reported sale on such date, on the last preceding
date on which any reported sale occurred) of a share on the
Composite Tape for the New York Stock Exchange-- Listed Stocks,
or, if the shares are not listed or admitted to trading on such
Exchange, on the principal United States securities exchange
registered under the Exchange Act on which the shares are listed
or admitted to trading, or, if the shares are not listed or
admitted to trading on any such exchange, the mean between the
closing high bid and low asked quotations with respect to a
share on such date as quoted on the National Association of
Securities Dealers Automated Quotations System, or any similar
system then in use, or, if no such quotations are available, the
fair market value on such date of a share as two-thirds of the
Continuing Directors shall determine.
(2) Certain Determinations.
(a) A Related Person shall be deemed for purposes of this
Article Twelfth to have acquired a share of the Corporation at
the time when such Related person became the beneficial owner
thereof. With respect to shares owned by affiliates, associates
or other Persons whose ownership is attributed to a Related
Person under the foregoing definition of Related Person, if the
price paid by such Related Person for such shares is not
determinable, the price so paid shall be deemed to be the higher
of (i) the price paid upon acquisition thereof by the affiliate,
associate or other Person or (ii) the Market Value of the shares
in question (as determined by two-thirds of the Continuing
Directors) at the time when the Related Person became the
beneficial owner thereof.
(b) For purposes of Subsection 1(2) (a) of this Article
Twelfth, in the event of a Business Combination upon
consummation of which the Corporation would be the surviving
corporation or would continue to exist (unless it is provided,
contemplated or intended that as part of such Business
Combination a plan of liquidation or dissolution of the
Corporation will be effected), the term "other consideration to
be received" shall include (with- out limitation) common stock
or other capital stock of the Corporation retained by
stockholders of the Corporation (other than Related Persons who
are parties to such Business Combination).
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<PAGE> 14
(3) Fiduciary obligations.
Nothing contained in this Article Twelfth shall be construed
to relieve any Related Person from any fiduciary obligation
imposed by law.
Subsection 3. Amendment and Repeal.
Notwithstanding any other provision of these Articles of
Incorporation or the Code of Regulations of the Corporation (and
notwithstanding the fact that a lessor percentage may be permitted by
law) any amendment, addition, alteration, change or repeal of this
Article Twelfth, or any other amendment of these Articles of
Incorporation or Code of Regulations of the Corporation inconsistent
with or modifying or permitting circumvention of this Article Twelfth,
must first be proposed by the board of directors of the Corporation,
upon the affirmative vote of at least two-thirds of the directors then
in office at a duly constituted meeting of the board of directors
called expressly for such purpose, and thereafter approved by the
affirmative vote of the holders of at least two-thirds of the then
outstanding Voting Shares of the Corporation, voting as a single class;
provided, however, that this Subsection 3 shall not apply to, and such
two-thirds vote shall not be required for, any such amendment,
addition, alteration, change or repeal recommended to stockholders of
the Corporation by the affirmative vote of not less than two-thirds of
the Continuing Directors. For the purposes of this Subsection 3 only,
if at the time when any such amendment, addition, alteration, change or
repeal is under consideration there is no proposed Business
Combination, the term "Continuing Directors" shall be deemed to mean
the Entire Board of Directors.
THIRTEENTH: Subject to the provision of Article Twelfth the vote
required to adopt an agreement of merger or consolidation at a meeting of
stockholders called for such purpose shall be the affirmative vote of the
holders of not less than a majority of the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors.
FOURTEENTH: The Code of Regulations may be made, repealed, altered,
amended or rescinded by the stockholders of the Corporation by the vote of the
holders of not less than a majority of the voting power of the Corporation
entitled to vote at a meeting of stockholders called for that purpose.
FIFTEENTH: The Corporation reserves the right to repeal, alter, amend
or rescind any provision contained in these Articles in the manner now or
hereafter prescribed by law upon the affirmative vote of at least a majority of
the voting power of the Corporation, and all rights conferred on stockholders
herein are granted subject to this reservation. Notwithstanding the foregoing,
the provisions of Articles Eighth, Ninth, Tenth, Eleventh
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<PAGE> 15
and Twelfth and this Article Fifteenth of these Articles may not be repealed,
replaced, altered, amended or rescinded in any respect unless the same is
approved by the affirmative vote of the holders of not less than two-thirds of
the voting power of the Corporation entitled to vote at a meeting of
stockholders called for that purpose (provided that notice of such proposed
adoption, repeal, replacement, alteration, amendment or rescission is included
in the notice of such meeting) .
IN WITNESS WHEREOF, the undersigned hereby declares and certifies that
this is his act and deed and the facts herein stated are true, and accordingly
has signed hereunto his name this 16th day of February, 1989.
/s/ Richard E. Herald
--------------------------------------
Richard E. Herald, Incorporator
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<PAGE> 16
FIRSTFEDERAL FINANCIAL SERVICES CORP
BOARD OF DIRECTORS RESOLUTIONS
SECRETARIAL CERTIFICATE
Gary G. Clark, President and L. Dwight Douce, Secretary of FirstFederal
Financial Services Corp, an Ohio corporation with its principal office in
Wooster, Wayne County, Ohio (the "Corporation") do hereby certify that they are
respectively President and Secretary of the Corporation and that a meeting of
the Board of Directors of the Corporation was held on August 5, 1992 and that
the following resolution to amend the Articles of Incorporation of the
Corporation was adopted by the Board of Directors of the Corporation pursuant to
the authority of Section 1701.70(B) (1) and 1701.73 (A) of the Ohio Revised Code
and that such resolution was adopted by the affirmative vote of not less than a
majority of the shares of the Corporation entitled to vote thereon at a special
meeting of stockholders of the Corporation on September 30, 1992, at which a
quorum was present and acting throughout.
RESOLVED, the Board of Directors believes that it is in the best
interest of the Corporation and its shareholders to submit to its shareholders
for approval at a Special Meeting, and directs management to do so, the
following proposed amendments to the Corporation's Articles of Incorporation:
FIRST: That the first sentence of Article FOURTH is hereby amended to
read in its entirety as follows:
FOURTH: The aggregate number of shares of all classes of capital
stock which the corporation has authority to issue is six million five
hundred thousand shares of which five million shares are to be shares of
common stock, $1.00 par value per share, and of which one million five
hundred thousand are to be shares of serial preferred stock, without par
value per share.
SECOND: That Article Fourth is hereby amended by deleting Division B in
its entirety and substituting therefor the following:
B. SERIAL PREFERRED STOCK. The Serial Preferred Stock shall have the
following express terms:
Section 1. SERIES. The Serial Preferred Stock may be issued from time to
time in one or more series. All shares of Serial Preferred Stock shall be of
equal rank and shall be identical, except in respect of the matters that may be
fixed by the Board of Directors as hereinafter provided, and each share of a
series shall be identical with all other shares of such services,
<PAGE> 17
except as to the dates from which dividends shall accrue and be cumulative.
Subject to the provisions of Section 2 through 6, inclusive, of this Division,
which provisions shall apply to all Serial Preferred Stock, the Board of
Directors hereby is authorized to cause such shares to be issued in one or more
series and with respect to each such series to determine and fix prior to the
issuance thereof (and thereafter, to the extent provided in clause (b) of this
Section) those rights, preferences and terms that may be fixed by the Board of
Directors, including the following:
(a) The designation of the series, which may be by
distinguishing number, letter or title;
(b) The authorized number of shares of the series, which number
the Board of Directors may (except where otherwise provided in the
creation of the series) increase or decrease from time to time before or
after the issuance thereof (but not below the number of shares thereof
then outstanding);
(c) The dividend rate or rates of the series;
(d) The dates on which and the period or periods for which
dividends, if declared, shall be payable and the date or dates from
which dividends shall accrue and be cumulative;
(e) The redemption rights and price or prices, if any, for
shares of the series;
(f) The terms and amount of the sinking fund, if any, for the
purchase or redemption of shares of the series;
(g) The amounts payable on shares of the series in the event of
any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation;
(h) Whether the shares of the series shall be convertible into
Common Stock or shares of any other class and, if so, the conversion
rate or rates or price or prices, any adjustments thereof and all other
terms and conditions upon which such conversion may be made; and
(i) Restrictions (in addition to those set forth in Section 5(b)
of this Division) on the issuance of shares of the same series or of any
other class or series.
The Board of Directors is authorized to adopt from time to time
amendments to the Articles of Incorporation fixing, with respect to each such
series, the matters described in clauses (a) through (i), inclusive, of this
Section and is further authorized to take such actions to amend the Articles of
Incorporation as may be required or permitted by law.
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<PAGE> 18
Section 2. Dividends.
---------
(a) The holders of Serial Preferred Stock of each series, in preference
to the holders of Common Stock and of any other class of shares ranking junior
to the Serial Preferred Stock, shall be entitled to receive out of any funds
legally available for Serial Preferred Stock and when and as declared by the
Board of Directors, dividends in cash at the rate or rates for such series fixed
in accordance with the provisions of Section 1 of this Division and no more,
payable on the dates fixed for such series. Such dividends may accrue and be
cumulative, in the case of shares of a particular series, from and after the
date or dates fixed with respect to such series. No dividends shall be paid upon
or declared or set apart for any series of the Serial Preferred Stock for any
dividend period unless at the same time a like proportionate dividend for the
dividend periods terminating on the same or any earlier date, ratably in
proportion to the respective dividend rates fixed therefor, shall have been paid
upon or declared or set apart for all Serial Preferred Stock of all series then
issued and outstanding and entitled to receive such dividend.
(b) So long as any Serial Preferred Stock shall be outstanding no
dividend, except a dividend payable in Common Stock or other shares ranking
junior to the Serial Preferred Stock, shall be paid or declared or any
distribution be made, except as aforesaid, in respect of the Common Stock or any
other shares ranking junior to the Serial Preferred Stock, nor shall any Common
Stock or any other shares ranking junior to the Serial Preferred Stock be
purchased, retired or otherwise acquired by the Corporation subsequent to the
date of first issuance of Serial Preferred Stock of any series, unless:
(1) All accrued and unpaid dividends on Serial Preferred Stock,
including the full dividends for all current dividend periods, shall
have been declared and paid or a sum sufficient for payment thereof set
apart; and
(2) There shall be no arrearages with respect to the redemption
of Serial Preferred Stock of any series from any sinking fund provided
for shares of such series in accordance with the provisions of Section 1
of this Division .
Section 3. Redemption.
----------
(a) Subject to the express terms of each series and to the provisions of
Section 5(b) (3) of this Division, the Corporation:
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<PAGE> 19
(1) May, from time to time, at the option of the Board of
Directors, redeem all or any part of any redeemable series of Serial
Preferred Stock at the time outstanding at the applicable redemption
price for such series fixed in accordance with the provisions of Section
1 of this Division; and
(2) Shall, from time to time, make such redemptions of each
series of Serial Preferred Stock as may be required to fulfill the
requirements of any sinking fund provided for shares of such series at
the applicable sinking fund redemption price fixed in accordance with
the provisions of Section 1 of this Division;
and shall in each case pay all accrued and unpaid dividends to the redemption
date.
(b) (1) Notice of every redemption shall be mailed, postage prepaid, to
the holders of record of the Serial Preferred Stock to be redeemed at
their respective addresses then appearing on the books of the
Corporation, not less than 30 days nor more than 60 days prior to the
date fixed for such redemption, or such other time prior thereto as the
Board of Directors shall fix for any series pursuant to Section 1 of
this Division prior to the issuance thereof. At any time after notice as
provided above has been deposited in the mail, the Corporation may
deposit the aggregate redemption price of Serial Preferred Stock to be
redeemed, together with accrued and unpaid dividends thereon to the
redemption date, with any bank or trust company having capital and
surplus of not less than $100,000,000 named in such notice and direct
that there be paid to the respective holders of the Serial Preferred
Stock so to be redeemed amounts equal to the redemption price of the
Serial Preferred Stock so to be redeemed, together with such accrued and
unpaid dividends thereon, on surrender of the share certificate or
certificates held by such holders; and upon the deposit of such notice
in the mail and the making of such deposit of money with such bank or
trust company, such holders shall cease to be shareholders with respect
to such shares; and from and after the time such notice shall have been
so deposited and such deposit of money shall have been so made, such
holders shall have no rights or claim against the Corporation with
respect to such shares, except only the right to receive such money from
such bank or trust company without interest or to exercise before the
redemption date any unexpired privileges of conversion. In the event
less than all of the outstanding shares of Serial Preferred Stock are to
be redeemed, the Corporation shall select by lot the
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<PAGE> 20
shares so to be redeemed in such manner as shall be prescribed by the
Board of Directors.
(2) If the holders of the Serial Preferred Stock which have been
called for redemption shall not within six years after such deposit
claim the amount deposited for the redemption thereof, any such bank or
trust company shall, upon demand, pay over to the Corporation such
unclaimed amounts and thereupon such bank or trust company and the
Corporation shall be relieved of all responsibility in respect thereof
and to such holders.
(c) Any Serial Preferred Stock which is (1) redeemed by the Corporation
pursuant to the provisions of this Section, (2) purchased and delivered in
satisfaction of any sinking fund requirements provided for shares of such
series, (3) converted in accordance with the express terms thereof, or (4)
otherwise acquired by the Corporation, shall resume the status of authorized but
unissued Serial Preferred Stock without serial designation.
Section 4. Liquidation.
-----------
(a) (1) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, the holders
of Serial Preferred Stock of any series shall be entitled to receive in
full out of the assets of the Corporation, including its capital, before
any amount shall be paid or distributed among the holders of the Common
Stock or any other shares ranking junior to the Serial Preferred Stock,
the amounts fixed with respect to shares of such series in accordance
with Section 1 of this Division, plus an amount equal to all dividends
accrued and unpaid thereon to the date of payment of the amount due
pursuant to such liquidation, dissolution or winding up of the affairs
of the Corporation. In the event the net assets of the Corporation
legally available therefor are insufficient to permit the payment upon
all outstanding shares of Serial Preferred Stock of the full
preferential amount to which they are respectively entitled, then such
net assets shall be distributed ratably upon all outstanding shares of
Serial Preferred Stock in proportion to the full preferential amount to
which each such share is entitled.
(2) After payment to the holders of Serial Preferred Stock of
the full preferential amounts as aforesaid, the holders of Serial
Preferred Stock, as such, shall have no right or claim to any of the
remaining assets of the Corporation.
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<PAGE> 21
(b) The merger or consolidation of the Corporation into or with any
other corporation, the merger of any other corporation into it, or the sale,
lease or conveyance of all or substantially all the assets of the Corporation,
shall not be deemed to be a dissolution, liquidation or winding up for the
purpose of this Section.
Section 5. Voting Rights.
-------------
(a) GENERAL. Except as expressly provided in this Section, or as
otherwise from time to time required by applicable law, the Serial Preferred
Stock shall have no voting rights.
(1) VOTING RIGHTS UPON DIVIDEND ARREARS. If, and so often as,
the Corporation shall be in default in the payment of the equivalent of
the full dividends on any series of Serial Preferred Stock at the time
outstanding, whether or not earned or declared, for six dividend payment
periods (whether or not consecutive), which in the aggregate contain at
least 540 days, the holders of Serial Preferred Stock of all series,
voting separately as a class, shall be entitled to elect, as herein
provided, two additional members of the Board of Directors of the
Corporation; provided however, that the holders of Serial Preferred
Stock shall not have or exercise such special class voting rights except
at meetings of such shareholders for the election of directors at which
the holders of not less than one-third of the outstanding Serial
Preferred Stock of all series then outstanding are present in person or
by proxy; and provided further that the special class voting rights
provided for in this paragraph when the same shall have become vested
shall remain so vested until all accrued and unpaid dividends on the
Serial Preferred Stock of all series then outstanding shall have been
paid, whereupon the holders of Serial Preferred Stock shall be divested
of their special class voting rights in respect of subsequent elections
of directors, subject to the revesting of such special class voting
rights in the event above specified in this paragraph.
(2) SPECIAL MEETING. In the event of default entitling the
holders of Serial Preferred Stock to elect two additional directors as
specified in paragraph (1) of this Section, a special meeting of such
holders for the purpose of electing such directors shall be called by
the Secretary of the Corporation upon written request of, or may be
called by, the holders of record of at least 25% of the shares of Serial
Preferred Stock of all series at the time outstanding, and notice
thereof shall be given in the same manner as that required for the
annual
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<PAGE> 22
meeting of shareholders; provided, however, that the Corporation shall
not be required to call such special meeting if the annual meeting of
shareholders shall be called to be held within 90 days after the date of
receipt of the foregoing written request from the holders of Serial
Preferred Stock. At any meeting at which the holders of Serial Preferred
Stock shall be entitled to elect directors, the holders of one-third of
the shares of Serial Preferred Stock of all series at the time
outstanding, present in person or by proxy, shall be sufficient to
constitute a quorum, and the vote of the holders of a plurality of such
shares so present at any such meeting at which there shall be such a
quorum shall be sufficient to elect the members of the Board of
Directors which the holders of Serial Preferred Stock are entitled to
elect as herein provided. Notwithstanding any provision of these
Articles of Incorporation or the Code of Regulations of the Corporation
or any action taken by the holders of any class of shares fixing the
number of directors of the Corporation, the two directors who may be
elected by the holders of Serial Preferred Stock pursuant to this
Section shall serve in addition to any other directors then in office or
proposed to be elected otherwise than pursuant to this Section. Nothing
in this Section shall prevent any change otherwise permitted in the
total number of directors of the Corporation or require the resignation
of any director elected otherwise than pursuant to this Section.
Notwithstanding any classification of the other directors of the
Corporation, the two directors elected by the holders of Serial
Preferred Stock shall be elected annually for terms expiring at the next
succeeding annual meeting of shareholders, subject to subsection (a) (3)
hereof .
(3) TERM OF OFFICE; VACANCIES. Upon any divesting of the special
class voting rights of the holders of the Serial Preferred Stock in
respect of elections of directors as provided in this Section, the terms
of office of all directors then in office elected by such holders shall
terminate immediately thereupon. If the office of any director elected
by such holders voting as a class becomes vacant by reason of death,
resignation, removal from office or otherwise, the remaining director
elected by such holders voting as a class may elect a successor who
shall hold office for the unexpired term in respect of which such
vacancy occurred.
(b) VOTING RIGHTS ON EXTRAORDINARY MATTERS. The affirmative vote or
consent of the holders of at least two- thirds of the shares of the Serial
Preferred Stock at the time outstanding, voting or consenting separately as a
class, given
-7-
<PAGE> 23
in person or by proxy either in writing or at a meeting called for the purpose,
shall be necessary to effect any one or more of the following (but so far as the
holders of Serial Preferred Stock are concerned, such action may be effected
with such vote or consent):
(1) Any amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Articles of
Incorporation or of the Code of Regulations of the Corporation which
affects materially and adversely the preferences or voting or other
rights of the holders of Serial Preferred Stock; provided, however,
neither the amendment of the Articles of Incorporation so as to
authorize, create or change the authorized or outstanding number of
Serial Preferred Stock or of any shares ranking on a parity with or
junior to the Serial Preferred Stock, nor the amendment of the
provisions of the Code of Regulations so as to change the number of
directors of the Corporation, shall be deemed to materially and
adversely affect the preferences or voting or other rights of the
holders of Serial Preferred Stock; and provided further, that if such
amendment, alteration or repeal materially and adversely affects the
preferences or voting or other rights of one or more but not all series
of Serial Preferred Stock at the time outstanding, the affirmative vote
or consent of the holders of at least two-thirds of the number of the
shares at the time outstanding of the series so affected shall be
required;
(2) The authorization, creation or the increase in the
authorized number of any shares, or any security convertible into
shares, in either case ranking prior to the Serial Preferred Stock; or
(3) The purchase or redemption (for sinking fund purposes or
otherwise) of less than all of the shares of the Serial Preferred Stock
then outstanding except in accordance with a stock purchase offer made
to all holders of record of Serial Preferred Stock, unless all dividends
on all Serial Preferred Stock then outstanding for all previous dividend
periods shall have been declared and paid or funds therefor set apart
and all accrued sinking fund obligations applicable thereto shall have
been complied with.
Notwithstanding anything to the contrary herein, an amendment
which increases the number of authorized shares of any class or series
of Preferred Stock or the creation or issuance of other classes or
series of Preferred Stock, in each case ranking on a parity with or
junior to the Series A Preferred Stock with respect to the payment
-8-
<PAGE> 24
of dividends and distribution of assets upon liquidation, dissolution or
winding up, or substitutes the surviving entity in a merger or
consolidation for the Corporation, shall not be considered to be such an
adverse change.
Section 6. DEFINITIONS. For the purposes of this Division:
(a) Whenever reference is made to shares "ranking prior to the
Serial Preferred Stock," such reference shall mean and include all
shares of the Corporation in respect of which the rights of the holders
thereof as to the payment of dividends or as to distributions in the
event of a voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation are given preference over the
rights of the holders of Serial Preferred Stock;
(b) Whenever reference is made to shares "on a parity with the
Serial Preferred Shares", such reference shall mean and include all
other shares of the Corporation in respect of which the rights of the
holders thereof as to the payment of dividends or as to distributions in
the event of a voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation rank equally (except as to
the amounts fixed therefor) with the rights of the holders of Serial
Preferred Stock; and
(c) Whenever reference is made to shares "ranking junior to the
Serial Preferred Stock," such reference shall mean and include all
shares of the Corporation other than those defined under Subsections (a)
and (b) of this Section as shares "ranking prior to" or "on a parity
with" the Serial Preferred Stock.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
seal of the Corporation this 1st day of October, 1992.
/s/ Gary G. Clark
------------------------------
Gary G. Clark
President
[SEAL]
/s/ L. Dwight Douce
------------------------------
L. Dwight Douce
Secretary
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<PAGE> 25
FIRSTFEDERAL FINANCIAL SERVICES CORP
- --------------------------------------------------------------------------------
Board of Directors Resolutions
Secretarial Certificate
- --------------------------------------------------------------------------------
Gary G. Clark, President and L. Dwight Douce, Secretary of
FirstFederal Financial Services Corp, an Ohio corporation with its principal
office in Wooster, Wayne County, Ohio (the "Corporation") do hereby certify that
they are respectively President and Secretary of the Corporation and that
meetings of the Board of Directors of the Corporation were held on August 5,
1992 and September 22, 1992 and that a meeting of the Designated Directors (as
appointed in the August 5, 1992) meeting was held on September 30, 1992 and that
the following resolution to amend the Articles of Incorporation of the
Corporation was adopted by the Board of Directors of the Corporation pursuant to
the authority of Section 1701.70(B)(1) and 1701.73(A) of the Ohio Revised Code
and Section 1 of Division (B) of Article Fourth of the Corporation's Articles of
Incorporation:
RESOLVED, that the Articles of Incorporation of the Corporation
be and they hereby are amended by adding at the end of Division B of Article
FOURTH thereof a new Section 7 reading as follows:
Section 7. 7% Cumulative Convertible Preferred Stock, Series A.
Of the 1,500,000 shares of authorized serial preferred stock, without
par value, 575,000 shares are hereby designated as a series entitled "
7% Cumulative Convertible Preferred Stock, Series A" (hereinafter called
"Series A Preferred Stock") . The Series A Preferred Stock shall have
the express terms set forth in this Division as being applicable to all
serial preferred stock as a class and, in addition, the following
express terms applicable to all Series A Shares as a series of serial
preferred stock:
(a) DIVIDEND RATE. The annual dividend rate of the Series A
Preferred Stock shall be 7 % of the liquidation preference of
$25.00 per share.
(b) DIVIDEND PAYMENT DATES. Dividends on Series A Preferred Stock
shall be payable, if declared, quarterly on March 1, June 1,
September 1 and December 1 of each year, the first quarterly
dividend being payable, if declared, on December 1, 1992. The
dividends payable for each full quarterly dividend period on
each share of Series A Preferred Stock shall be $.4375.
<PAGE> 26
Dividends for the initial dividend period on the Series A
Preferred Stock, or for any period shorter or longer than a full
dividend period on the Series A Preferred Stock shall be
computed on the basis of 30-day months and a 360-day year. The
aggregate dividend payable quarterly to each holder of Series A
Preferred Stock shall be rounded to the nearest one cent with
$.005 being rounded upward. Each dividend shall be payable to
the holders of record on such record date, not less than 15 nor
more than 30 days preceding the payment date thereof, as shall
be fixed from time to time by the Corporation's Board of
Directors.
(c) CUMULATIVE DIVIDENDS. Dividends on Series A Preferred Stock
shall be cumulative as follows:
(1) With respect to shares included in the initial issue of
Series A Preferred Stock and preferred shares issued any
time thereafter up to and including the record date for
the payment of the first dividend on the initial issue of
Series A Preferred Stock, dividends shall be cumulative
from the date of the initial issue of Series A Preferred
Stock; and
(2) With respect to preferred shares issued any time after the
aforesaid record date for payment of the first dividend on
the initial issue of Series A Preferred Stock, dividends
shall be cumulative from the dividend payment date next
preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the
day after the record date for the payment of a dividend on
Series A Preferred Stock and ending on the payment date of
that dividend, dividends with respect to such shares shall
be cumulative from that dividend payment date.
(d) REDEMPTION. Subject to the provisions of Section 5(b) (3) of
this Division, the Series A Preferred Stock shall be redeemable
in the manner provided in Subsections 3(b) (1) and (2) of this
Division as follows:
(1) The shares of Series A Preferred Stock may not be redeemed
prior to December 15, 1997. On and after December 15,
1997, the shares of Series A Preferred Stock may be
redeemed, in whole or in part, at the election of the
Corporation, upon notice as provided in the Articles of
Incorporation, by resolution of its Board of Directors, at
any time or from time to time, at the following redemption
prices plus, in each case, an amount equal to all
-2-
<PAGE> 27
accumulated, accrued, and unpaid dividends to the date
fixed for redemption:
<TABLE>
<CAPTION>
If Redeemed If Redeemed
During the During the
12-Month 12-Month
Period Period Per Share
Beginning Per Share Beginning Redemption
After Redemption After Price
December 15 Price December 15 ----------
- ------------ ----------- ------------
<S> <C> <C> <C>
1997 $26.00 2000 $25.40
1998 25.80 2001 25.20
1999 25.60 2002 and 25.00
thereafter
</TABLE>
(e) CONVERSION. Shares of the Series A Preferred Stock shall be
convertible into Common Stock on the following terms and
conditions:
(1) CONVERSION RIGHT. Subject to and upon compliance with the
provisions of this Section 7(e), the holder of any shares
of Series A Preferred Stock may at such holder's option,
at any time or from time to time, convert any such shares
into the number of fully paid and non-assessable shares of
Common Stock determined by dividing (i) the product of $25
and the number of shares of Series A Preferred Stock to be
converted by (ii) the conversion price (the "Conversion
Price") in effect on the conversion date. The initial
Conversion Price shall be 120.5% of the bid price of the
common stock per share at the time the offering of Series
A Preferred Stock commences, as such bid price is reported
on the NASDAQ National Market System, subject to
adjustment as set forth in paragraph (4) of this Section
7(e). If any shares of Series A Preferred Stock shall be
called for redemption, the right to convert such shares
shall terminate and expire at the close of business on the
redemption date.
(2) DIVIDEND UPON CONVERSION OR REDEMPTION. No payment or
adjustment shall be made by the Corporation to any holder
of shares of Series A Preferred Stock surrendered for
conversion or redemption in respect of dividends accrued
since the last preceding dividend payment date on the
shares of Series A Preferred Stock surrendered for
conversion; PROVIDED, HOWEVER, that if shares of Series A
Preferred Stock shall be converted or redeemed
-3-
<PAGE> 28
subsequent to any record date with respect to any dividend
payment date and prior to the next such succeeding
dividend payment date, the dividend falling due on such
dividend payment date shall be payable on such dividend
payment date notwithstanding such conversion or
redemption, and such dividend (whether or not punctually
paid or duly provided for) shall be paid to the person in
whose name such shares are registered at the close of
business on such record date.
(3) Method of Conversion.
--------------------
(i) The surrender of any shares of Series A Preferred
Stock for conversion shall be made by the holder thereof by
delivering the certificate or certificates evidencing ownership
of such shares with proper endorsement or instruments of
transfer to the Corporation at the office or agency to be
maintained by the Corporation for that purpose, and such holder
shall give written notice to the Corporation at said office or
agency that he elects to convert such shares of Series A
Preferred Stock in accordance with the provisions thereof and of
this Section 7(e). Such notice shall also state the number of
whole shares of Series A Preferred Stock and the name or names
(with addresses) in which the certificate or certificates
evidencing ownership of Common Stock which shall be issuable on
such conversion shall be issued. In the case of lost or
destroyed certificates evidencing ownership of shares of Series
A Preferred Stock to be surrendered for conversion, the holder
shall submit proof of loss or destruction and such indemnity as
shall be required by the Corporation.
(ii) Subject to the provisions of Section 7(e)(6) hereof,
every such notice of election to convert shall constitute a
contract between the holder of such shares of Series A Preferred
Stock and the Corporation, whereby such holder shall be deemed
to subscribe for the amount of the Common Stock which he will be
entitled to receive upon such conversion and, in payment and
satisfaction of such subscription, to surrender such shares of
Series A Preferred Stock and to release the Corporation from all
obligations thereon (subject to the payment of accrued dividends
in accordance with Section 7(e) (2) hereof), and whereby the
Corporation shall be deemed to agree that the surrender of such
shares of Series A Preferred Stock and the extinguishment of its
obligation thereon (except as aforesaid), shall constitute full
payment for the Common Stock so subscribed for and to be issued
upon such conversion.
-4-
<PAGE> 29
(iii) As soon as practicable after its receipt of such
notice and the certificate or certificates evidencing ownership
of such shares of Series A Preferred Stock, the Corporation
shall issue and shall deliver at said office or agency to the
person for whose account such shares of Series A Preferred Stock
were so surrendered, or on his or her written order, a
certificate or certificates for the number of such shares of
common stock into which the Series A Preferred Stock surrendered
is to be converted and a check or cash payment (if any) to which
such holder is entitled with respect to fractional shares as
determined by the Corporation, in accordance with Section 7(e)
hereof, at the close of business on the date of conversion.
(iv) Such conversion shall be deemed to have been effected
on the date on which the Corporation shall have received such
notice and the certificate or certificates for such shares of
Series A Preferred Stock; and the person or persons in whose
name or names any certificate or certificates for Common Stock
shall be issuable upon such conversion shall be deemed to have
become on said date the holder or holders of record of the
shares represented thereby; provided that any such surrender on
any date when the stock transfer books of the Corporation shall
be closed shall become effective for all purposes on the next
succeeding day on which such stock transfer books are open, but
such conversion shall be at the Conversion Price in effect on
the date upon which such surrender occurs.
(4) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price
shall be subject to adjustments from time to
time as follows:
(i) In case the Corporation shall at any time (A) declare
a dividend on the Common Stock in shares of its capital stock,
(B) subdivide its outstanding Common Stock, (C) combine the
outstanding Common Stock into a smaller number of shares, or (D)
issue any shares of its capital stock by reclassification of the
Common Stock (including any such reclassification in connection
with a consolidation or merger in which the Corporation is the
surviving corporation), the Conversion Price in effect on the
record date for such dividend or on the effective date of such
subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any Series A
Preferred Stock converted after such time shall be entitled to
receive the aggregate number and kind of shares which, if such
Series A Preferred Stock had been converted immediately prior to
such time, the holder would have owned upon such conversion and
been
-5-
<PAGE> 30
entitled to receive by virtue of such dividend, subdivision,
combination or reclassification. Such adjustment shall be
made successively whenever any event listed above shall occur.
(ii) In case the Corporation shall issue rights or
warrants to all holders of its Common Stock (which rights or
warrants are not available on an equivalent basis to holders of
the Series A Preferred Stock on conversion) entitling them to
subscribe for or purchase Common Stock at a price per share less
than the current market price per share (as defined in
subparagraph (iv) of this paragraph (4), at the record date for
the determination of stockholders entitled to receive such
rights or warrants, the Conversion Price shall be adjusted
(subject to the limitations contained in subparagraph (vii) of
this paragraph (4)) by multiplying the Conversion Price in
effect immediately prior to such record date by a fraction, the
denominator of which shall be the number of shares of Common
Stock outstanding on such date of issue plus the number of
additional shares of Common Stock to be offered for subscription
or purchase and the numerator of which shall be the number of
shares of Common Stock outstanding on the date of issue plus the
number of shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so to be
offered would purchase at such current market price. Such
adjustment shall become effective at the close of business on
such record date; however, to the extent that Common Stock is
not delivered after the expiration of such rights or warrants,
the Conversion Price shall be readjusted (but only with respect
to Series A Preferred Stock converted after such expiration) to
the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of
shares of Common Stock actually issued.
(iii) In case the Corporation shall distribute to all
holders of Common Stock (including any such distribution made in
connection with a consolidation or merger in which the
Corporation is the surviving corporation) evidences of its
indebtedness or assets (including securities but excluding cash
dividends or distributions paid out of retained earnings and
dividends payable in Common Stock) or subscription rights or
warrants (excluding those referred to in subparagraph (ii) of
this paragraph (4), the Conversion Price shall be adjusted
(subject to the limitations contained in subparagraph (vii) of
this paragraph (4)) by multiplying the Conversion Price in
effect immediately prior to the record date for determination of
stockholders entitled to
-6-
<PAGE> 31
receive such distribution by a fraction, the denominator of
which shall be the current market price per share of Common
Stock (as defined in subparagraph (iv) of this paragraph (4)) on
such record date and the numerator of which shall be such
current market price per share of Common Stock, less the fair
market value (as determined by the Board of Directors, whose
determination shall be conclusive) of the portion of the
evidences of indebtedness or assets or subscription rights or
warrants so to be distributed which are applicable to one share
of Common Stock. Such adjustment shall become effective at the
close of business on such record date.
(iv) For the purpose of any computation under
subparagraphs (ii) and (iii) of this paragraph (4), the current
market price per share of Common Stock on any record date shall
be deemed to be the average of the daily closing prices for the
five consecutive business days selected by the Board of
Directors commencing not more than 20 trading days before, and
ending not later than, the earlier of the day in question and
the day before the "ex" date with respect to the issuance or
distribution requiring such computation. For this purpose, the
term "'ex' date", when used with respect to any issuance or
distribution, shall mean the first date on which the Common
Stock trades regular way on the applicable exchange or in the
applicable market without the right to receive such issuance or
distribution. The closing price for each date shall be the
reported last sale price regular way or, in case no such
reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either
case on the New York Stock Exchange or, if the Common Stock is
not listed or admitted to trading on such exchange, on the
principal national securities exchange on which the Common Stock
is listed or admitted to trading, or, if not listed or admitted
to trading on any national securities exchange, on the National
Association of Securities Dealers Automated Quotations National
Market System, or, if the Common Stock is not listed or admitted
to trading on any national securities exchange or quoted on such
National Market System, the average of the closing bid and asked
prices in the over-the-counter market as furnished by any New
York Stock Exchange member firm selected from time to time by
the Board for that purpose.
(v) In the case of any consolidation of the Corporation
with, or merger of the Corporation into, any other entity, any
merger of another entity into the Corporation (other than a
merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of
Common Stock of the
-7-
<PAGE> 32
Corporation) or any sale or transfer of all or substantially all
of the assets of the Corporation, each holder of a share of
Series A Preferred Stock then outstanding shall have the right
thereafter to convert such share only into the kind and amount
of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the
number of shares of Common Stock of the Corporation into which
such shares of Series A Preferred Stock might have been
converted immediately prior to such consolidation, merger sale
or transfer, assuming such holder of Common Stock of the
Corporation is not an entity with which the Corporation
consolidated or into which the Corporation merged or which
merged into the Corporation or to which such sale or transfer
was made, as the case may be ("constituent entity"), or an
affiliate of a constituent entity, and assuming such holder
failed to exercise his rights of election, if any, as to the
kind or amount of securities, cash and other property receivable
upon such consolidation, merger, sale or transfer (provided that
if the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer is
not the same for each share of Common Stock of the Corporation
held immediately prior to such consolidation, merger, sale or
transfer by other than a constituent entity or an affiliate
thereof in respect of which such rights of election shall not
have been exercised ("non-electing share"), then for the purpose
of this subsection (v) the kind and amount of securities, cash
and other property receivable upon such consolidation, merger,
sale or transfer by each non-electing share shall be deemed to
be the kind and amount so receivable per share by a plurality of
the non-electing shares) . If necessary, appropriate adjustment
shall be made in the application of the provisions set forth
herein with respect to the rights and interests thereafter of
the holders of shares of Series A Preferred Stock, to the end
that the provisions set forth herein shall thereafter
correspondingly be made applicable, as nearly as may reasonably
be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares.
The above provisions shall similarly apply to successive
consolidations, mergers, sales or transfers. The Corporation
shall not effect any such consolidation, merger or sale, unless
prior to or simultaneously with the consummation thereof the
successor corporation (if other than the Corporation) resulting
from such consolidation or merger or the corporation purchasing
such assets or other appropriate corporation or entity shall
assume, by written instrument, the obligation to deliver to the
holder of each share of Series A Preferred Stock such
-8-
<PAGE> 33
shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to receive
under this Section 7(e)(4).
(vi) The Corporation may make such adjustments in the
Conversion Price, in addition to those required by subparagraphs
(i) through (v) of this Section 7(e) (4), as it considers to be
advisable in order that any event treated for Federal income tax
purposes as a dividend of stock or stock rights shall not be
taxable to the recipients.
(vii) No adjustment in the Conversion Price will be made
for the issuance of shares of capital stock to employees
pursuant to the Corporation's or any of its subsidiaries' stock
option, stock ownership or other benefit plans. No adjustment
will be required to be made in the Conversion Price until
cumulative adjustments require an adjustment of at least 1% of
such Conversion Price.
(5) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of any
shares of Series A Preferred Stock, but the holder thereof will
receive in cash an amount equal to the value of such fractional
share of Common Stock based on the current market price (as
defined in subparagraph (iv) of Section 7(e)(4). If more than
one share of Series A Preferred Stock shall be surrendered for
conversion at one time by the same holder, the number of full
shares issuable upon conversion thereof shall be computed on the
basis of the aggregate number of such shares so surrendered.
(6) PAYMENT OF TAXES. The Corporation shall pay any tax in respect
of the issue of stock certificates on conversion of shares of
Series A Preferred Stock. The Corporation shall not, however, be
required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of stock in any name
other than that of the holder of the shares converted, and the
Corporation shall not be required to issue or deliver any such
stock certificate unless and until the person or persons
requesting the issuance hereof shall have paid the Corporation
the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.
(7) COMMON STOCK RESERVED FOR CONVERSION. The Corporation shall at
all times reserve and keep available out of its authorized and
unissued Common Stock or have available in its treasury the full
number of shares of Common Stock
-9-
<PAGE> 34
deliverable upon the conversion of all outstanding shares of
Series A Preferred Stock and shall take all such action as may
be required from time to time in order that it may validly and
legally issue fully paid and non-assessable shares of Common
Stock upon conversion of the Series A Preferred Stock.
(8) NOTICE. In the event:
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock (other than a cash dividend
payable out of retained earnings); or
(ii) the Corporation shall authorize the issuance to
holders of its Common Stock of rights or warrants to subscribe
for or purchase Common Stock; or
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its
outstanding Common Stock, or a change in par value, or from par
value to no par value, or from no par value to par value) or of
any consolidation or merger to which the Corporation is a party
or of the sale or transfer of all or substantially all of the
assets of the Corporation and for which approval of any
stockholders of the Corporation is required; or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, and in each event, the Corporation shall cause to be
mailed to each holder of Series A Preferred Stock, at his
address as the same shall appear on the books of the
Corporation, as promptly as possible but in any event at least
fifteen days prior the applicable date hereinafter specified, a
notice stating (A) the date on which a record is to be taken for
the purpose of such dividend, distribution, rights or warrants,
or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such
dividend, distribution or rights are to be determined, and the
nature and amount of such dividend, distribution, rights or
warrants or (B) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation
or winding up is expected to become effective, and the date as
of which it is expected that holders of Common Stock of record
shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation
or winding up.
-10-
<PAGE> 35
(f) "COMMON STOCK." For the purposes of Section 7(e), "Common Stock"
shall mean stock of the Corporation of any class, whether now or
hereafter authorized, which has the right to participate in the
distribution of either earnings or assets of the Corporation
without limit as to the amount or percentage, including, without
limitation, the Common Stock. In case by reason of the operation
of paragraph (4) of Section 7(e) the shares of Series A
Preferred Stock shall be convertible into any other shares of
stock or other securities or property of the Corporation or of
any other corporation, any reference herein to the conversion of
shares of Series A Preferred Stock pursuant to Section 7(e)
shall be deemed to refer to and include the conversion of shares
of Series A Preferred Stock into such other shares of stock or
other securities or property.
(g) NO SINKING FUND. No sinking fund will be established for the
retirement or redemption of shares of Series A Preferred Stock.
(h) LIQUIDATION RIGHTS; PRIORITY.
(i) The amount payable per share of Series A Preferred
Stock in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation
shall be $25.00, plus an amount equal to all dividends accrued
and unpaid thereon to the date of payment.
(ii) Nothing contained herein shall be deemed to prevent
redemption of shares of the Series A Preferred Stock by the
Corporation in the manner provided in Section 7(d). Neither the
merger nor consolidation of the Corporation into or with any
other corporation, nor the merger or consolidation of any other
corporation into or with the Corporation, nor a sale, transfer
or lease of all or any part of the assets of the Corporation,
shall be deemed to be a liquidation, dissolution or winding up
of the Corporation within the meaning of this Section 7(h).
(iii) No payment on account of such liquidation,
dissolution or winding up of the affairs of the Corporation
shall be made to the holders of any class or series of stock
ranking on a parity with the Series A Preferred Stock in respect
of the distribution of assets, unless there shall likewise be
paid at the same time to the holders of the Series A Preferred
Stock like proportionate distributive amounts, ratably, in
proportion to the full distributive amounts to which they and
the holders of such parity stock are respectively entitled with
respect to such preferential distribution.
-11-
<PAGE> 36
IN WITNESS WHEREOF, we have hereunto set our hand and affixed the seal
of the Corporation this 1st day of October 1992.
/s/ Gary G. Clark
----------------------------------
Gary G. Clark
President
[SEAL]
/s/ L. Dwight Douce
----------------------------------
L. Dwight Douce
Secretary
-12-
<PAGE> 37
CERTIFICATE OF AMENDMENT
(BY SHAREHOLDERS)
TO THE ARTICLES OF INCORPORATION
FIRSTFEDERAL FINANCIAL SERVICES CORP
( ) Chairman of the Board
Gary C. Clark , who is (X) President (check one)
- -------------------- ( ) Vice President
and L. Dwight Douce , who is (X) Secretary (check one)
- -------------------- ( ) Assistant Secretary
of the above named Ohio corporation for profit with its principal location at
Wooster, Wayne County, Ohio, do hereby certify that: (check the appropriate
box and complete the appropriate statements)
X a meeting of the shareholders was duly called and held on April 21,
- --- 1994, at which meeting a quorum of the shareholders was present in
person or by proxy, and by the affirmative vote of the shareholders of
shares entitling them to exercise 74.9 % of the voting power of the
corporation,
in a writing signed by all of the shareholders who would be entitled to
- --- a notice of a meeting held for that purpose,
the following resolution was adopted to amend the articles:
RESOLVED, that the first sentence of Article Fourth is hereby amended
to read in its entirety as follows:
FOURTH: The aggregate number of shares of all classes of capital
stock which the corporation has authority to issue is twenty-one
million five hundred thousand shares of which 20 million shares are to
be shares of common stock, $1.00 par value per share, and of which one
million five hundred thousand are to be shares of serial preferred
stock, without par value per share.
The Articles of Incorporation shall otherwise remain unchanged.
IN WITNESS WHEREOF, the above named officers, acting for and on behalf of
the corporation, have subscribed their names this 21st day of April, 1994.
/s/ Gary G. Clark
----------------------------------------
Gary G. Clark President
/s/ L. Dwight Douce
----------------------------------------
L. Dwight Douce, Secretary
<PAGE> 38
SECRETARIAL CERTIFICATE
-----------------------
Gary G. Clark, Chairman of the Board, President and Chief Executive
Officer, and L. Dwight Douce, Secretary and Treasurer of FirstFederal Financial
Services Corp, an Ohio corporation with its principal office in Wooster, Wayne
County, Ohio (the "Corporation") do hereby certify that they are respectively
President and Secretary of the Corporation and that on June 21, 1994, at a
meeting of the Board of Directors at which a quorum was present, the Board, by
majority vote of the Directors present, authorized, adopted and approved the
following resolution to amend the Articles of Incorporation of the Corporation
pursuant to the authority of Section 1701.70(B)(l) and 1701.73(A) of the Ohio
Revised Code and Section 1 of Division (B) of Article Fourth of the
Corporation's Articles of Incorporation:
RESOLVED, that the Articles of Incorporation of the Corporation be and
they hereby are amended by adding at the end of Division B of Article
FOURTH thereof a new Section 8 reading as follows:
Section 8. 6 1/2% Cumulative Convertible Preferred Stock Series B.
Of the 1,500,000 shares of authorized serial preferred stock, without
par value, 500,000 shares are hereby designated as a series entitled "6
1/2% Cumulative Convertible Preferred Stock, Series B" (hereinafter
called "Series B Preferred Stock"). The Series B Preferred Stock shall
have the express terms set forth in this Division as being applicable
to all serial preferred stock as a class and, in addition, the
following express terms applicable to all Series B Shares as a series
of serial preferred stock:
(a) DIVIDEND RATE. The annual dividend rate of the Series B Preferred
Stock shall be 6 1/2% of the liquidation preference of $25.00 per
share.
(b) DIVIDEND PAYMENT DATES. Dividends on Series B Preferred Stock
shall be payable, if declared , quarterly on March 1, June 1,
September 1, and December 1 of each year, the first quarterly
dividend being payable, if declared, on September 1, 1994. The
dividends payable for each full quarterly dividend period on each
share of Series B Preferred Stock shall be $.40625.
<PAGE> 39
Dividends for a dividend period on the Series B Preferred Stock,
or for any period shorter or longer than a full dividend period on
the Series B Preferred Stock shall be computed on the basis of
30-day months and a 360-day year. The aggregate dividend payable
quarterly to each holder of Series B Preferred Stock shall be
rounded to the nearest one cent with $.005 being rounded upward.
Each dividend shall be payable to the holders of record on such
record date, not less than 15 nor more than 30 days preceding the
payment date thereof, as shall be fixed from time to time by the
Corporation's Board of Directors
(c) CUMULATIVE DIVIDENDS. Dividends on Series B Preferred Stock shall
be cumulative as follows:
(1) With respect to shares included in the issue of Series B
Preferred Stock and preferred shares issued any time
thereafter up to and including the record date for the
payment of the first dividend on the issue of Series B
Preferred Stock, dividends shall be cumulative from the
date of the issue of Series B Preferred Stock; and
(2) With respect to preferred shares issued any time after the
aforesaid record date for payment of the first dividend on
the issue of Series B Preferred Stock, dividends shall be
cumulative from the dividend payment date next preceding
the date of issue of such shares, except that if such
shares are issued during the period commencing the day
after the record date for the payment of a dividend on
Series B Preferred Stock and ending on the payment date of
that dividend, dividends with respect to such shares shall
be cumulative from that dividend payment date.
(d) REDEMPTION. Subject to the provisions of Section 5(b)(3) of this
Division, the Series B Preferred Stock shall be redeemable in the
manner provided in Subsections 3(b)(l) and (2) of this Division as
follows:
(1) The shares of Series B Preferred Stock may not be redeemed
prior to June 24, 1999. On and after June 24, 1999, the
shares of Series B Preferred Stock may be redeemed, in
whole or in part, at the election of the Corporation, upon
notice as provided in the Articles of Incorporation, by
resolution of its Board of Directors, at any time or from
time to time, at a redemption price of $25.00 per share,
plus, in each case, an amount equal to all accumulated,
accrued, and unpaid dividends on the date fixed for
redemption.
-2-
<PAGE> 40
(e) CONVERSION. Shares of the Series B Preferred Stock shall be convertible
into Common Stock on the following terms and conditions:
(1) CONVERSION RIGHT. Subject to and upon compliance with the
provisions of this Section 8(e), the holder of any shares of
Series B Preferred Stock may at such holder's option, at any time
or from time to time, convert any such shares into the number of
fully paid and non-assessable shares of Common Stock determined by
dividing (i) the product of $25.00 and the number of shares of
Series B Preferred Stock to be converted by (ii) the conversion
price (the "Conversion Price") in effect on the conversion date.
The initial Conversion Price shall be 125% of the bid price of the
common stock per share at the time the offering of Series B
Preferred Stock commences, as such bid price is reported on the
NASDAQ National Market System, subject to adjustment as set forth
in paragraph (4) of this Section 8(e). If any shares of Series B
Preferred Stock shall be called for redemption, the right to
convert such shares shall terminate and expire at the close of
business on the redemption date.
(2) DIVIDEND UPON CONVERSION OR REDEMPTION. No payment or adjustment
shall be made by the Corporation to any holder of shares of Series
B Preferred Stock surrendered for conversion or redemption in
respect of dividends accrued since the last preceding dividend
payment date on the shares of Series B Preferred Stock surrendered
for conversion; PROVIDED, HOWEVER, that if shares of Series B
Preferred Stock shall be converted or redeemed subsequent to any
record date with respect to any dividend payment date and prior to
the next such succeeding dividend payment date, the dividend
falling due on such dividend payment date shall be payable on such
dividend payment date notwithstanding such conversion or
redemption, and such dividend (whether or not punctually paid or
duly provided for) shall be paid to the person in whose name such
shares are registered at the close of business on such record
date.
(3) METHOD OF CONVERSION.
(i) The surrender of any shares of Series B Preferred Stock for
conversion shall be made by the holder thereof by delivering the
certificate or
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<PAGE> 41
certificates evidencing ownership of such shares with proper
endorsement or instruments of transfer to the Corporation at the office
or agency to be maintained by the Corporation for that purpose, and
such holder shall give written notice to the Corporation at said office
or agency that he elects to convert such shares of Series B Preferred
Stock in accordance with the provisions thereof and of this Section
8(e). Such notice shall also state the number of whole shares of Series
B Preferred Stock and the name or names (with addresses) in which the
certificate or certificates evidencing ownership of Common Stock which
shall be issuable on such conversion shall be issued. In the case of
lost or destroyed certificates evidencing ownership of shares of Series
B Preferred Stock to be surrendered for conversion, the holder shall
submit proof of loss or destruction and such indemnity as shall be
required by the Corporation.
(ii) Subject to the provisions of Section 8(e)(6) hereof, every
such notice of election to convert shall constitute a contract between
the holder of such shares of Series B Preferred Stock and the
Corporation, whereby such holder shall be deemed to subscribe for the
amount of the Common Stock which he will be entitled to receive upon
such conversion and, in payment and satisfaction of such subscription,
to surrender such shares of Series B Preferred Stock and to release the
Corporation from all obligations thereon (subject to the payment of
accrued dividends in accordance with Section 8(e)(2) hereof), and
whereby the Corporation shall be deemed to agree that the surrender of
such shares of Series B Preferred Stock and the extinguishment of its
obligation thereon (except as aforesaid), shall constitute full
payment for the Common Stock so subscribed for and to be issued upon
such conversion.
(iii) As soon as practicable after its receipt of such notice and
the certificate or certificates evidencing ownership of such shares of
Series B Preferred Stock, the Corporation shall issue and shall deliver
at said office or agency to the person for whose account such shares of
Series B Preferred Stock were so surrendered, or on his or her written
order, a certificate or certificates for the number of such shares of
common stock into which the Series B Preferred Stock surrendered is to
be converted and a check or cash payment (if any) to which such holder
is entitled with respect to fractional shares as determined by the
Corporation, in accordance with Section 8(e) hereof, at the close of
business on the date of conversion.
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<PAGE> 42
(iv) Such conversion shall be deemed to have been effected on the
date on which the Corporation shall have received such notice and the
certificate or certificates for such shares of Series B Preferred
Stock; and the person or persons in whose name or names any certificate
or certificates for Common Stock shall be issuable upon such conversion
shall be deemed to have become on said date the holder or holders of
record of the shares represented thereby; provided that any such
surrender on any date when the stock transfer books of the Corporation
shall be closed shall become effective for all purposes on the next
succeeding day on which such stock transfer books are open, but such
conversion shall be at the Conversion Price in effect on the date upon
which such surrender occurs.
(4) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be
subject to adjustments from time to time as follows:
(i) In case the corporation shall at any time (A) declare a
dividend on the Common Stock in shares of its capital stock, (B)
subdivide its outstanding Common Stock, (C) combine the outstanding
Common Stock into a smaller number of shares, or (D) issue any shares
of its capital stock by reclassification of the Common Stock (including
any such reclassification in connection with a consolidation or merger
in which the Corporation is the surviving corporation), the
Conversation Price in effect on the record date for such dividend or on
the effective date of such subdivision, combination or reclassification
shall be proportionately adjusted so that the holder of any Series B
Preferred Stock converted after such time shall be entitled to receive
the aggregate number and kind of shares which, if such Series B
Preferred Stock had been converted immediately prior to such time, the
holder would have owned upon such conversion and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever
any event listed above shall occur.
(ii) In case the Corporation shall issue rights or warrants to all
holders of its Common Stock (which rights or warrants are not available
on an equivalent basis to holders of the Series B Preferred Stock on
conversion) entitling them to subscribe for or purchase Common Stock at
a price per share less than the current market price per share (as
defined in subparagraph (iv) of this paragraph (4), at the record
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<PAGE> 43
date for the determination of stockholders entitled to receive such
rights or warrants, the Conversion Price shall be adjusted (subject to
the limitations contained in subparagraph (vii) of this paragraph (4))
by multiplying the Conversion Price in effect immediately prior to such
record date by a fraction, the denominator of which shall be the number
of shares of Common Stock outstanding on such date of issue plus the
number of additional shares of Common Stock to be offered for
subscription or purchase and the numerator of which shall be the number
of shares of Common Stock outstanding on the date of issue plus the
number of shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock so to be offered would
purchase at such current market price. Such adjustment shall become
effective at the close of business on such record date; however, to the
extent that Common Stock is not delivered after the expiration of such
rights or warrants, the Conversion Price shall be readjusted (but only
with respect to Series B Preferred Stock converted after such
expiration) to the Conversion Price which would then be in effect had
the adjustments made upon the issuance of such rights or warrants been
made upon the basis of delivery of only the number of shares of Common
Stock actually issued.
(iii) In case the Corporation shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Corporation is the surviving
corporation) evidences of its indebtedness or assets (including
securities but excluding cash dividends or distributions paid out of
retained earnings and dividends payable in Common Stock) or
subscription rights or warrants (excluding those referred to in
subparagraph (ii) of this paragraph (4), the Conversion Price shall be
adjusted (subject to the limitations contained in subparagraph (vii) of
this paragraph (4)) by multiplying the Conversion Price in effect
immediately prior to the record date for determination of stockholders
entitled to receive such distribution by a fraction, the denominator of
which shall be the current market price per share of Common Stock (as
defined in subparagraph (iv) of this paragraph (4)) on such record date
and the numerator of which shall be such current market price per share
of Common Stock, less the fair market value (as determined by the Board
of Directors, whose determination shall be conclusive) of the portion
of the evidences of indebtedness or assets or subscription rights or
warrants so to be distributed
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<PAGE> 44
which are applicable to one share of Common Stock. Such adjustment
shall become effective at the close of business on such record date.
(iv) For the purpose of any computation under subparagraphs (ii)
and (iii) of this paragraph (4), the current market price per share of
Common Stock on any record date shall be deemed to be the average of
the daily closing prices for the five consecutive business days
selected by the Board of Directors commencing not more than 20 trading
days before, and ending not later than, the earlier of the day in
question and the day before the "ex" date with respect to the issuance
or distribution requiring such computation. For this purpose, the term
" 'ex' date," when used with respect to any issuance or distribution,
shall mean the first date on which the Common Stock trades regular way
on the applicable exchange or in the applicable market without the
right to receive such issuance or distribution. The closing price for
each date shall be the reported last sale price regular way or, in case
no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on
the New York Stock Exchange or, if the Common Stock is not listed or
admitted to trading on such exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to
trading, or, if not listed or admitted to trading on any national
securities exchange, on the National Association of Securities Dealers
Automated Quotations National Market System, or, if the Common Stock is
not listed or admitted to trading on any national securities exchange
or quoted on such National Market System, the average of the closing
bid and asked prices in the over-the-counter market as furnished by any
New York Stock Exchange member firm selected from time to time by the
Board for that purpose.
(v) In the case of any consolidation of the Corporation with, or
merger of the Corporation into , any other entity, any merger of
another entity into the Corporation (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Corporation) or any sale or
transfer of all or substantially all of the assets of the Corporation,
each holder of a share of Series B Preferred Stock then outstanding
shall have the right thereafter to convert such share only into the
kind and amount of securities, cash and other property receivable upon
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<PAGE> 45
such consolidation, merger, sale or transfer by a holder of the number
of shares of Common Stock of the Corporation into which such shares of
Series B Preferred Stock might have been converted immediately prior to
such consolidation, merger, sale or transfer, assuming such holder of
Common Stock of the Corporation is not an entity with which the
Corporation consolidated or into which the corporation merged or which
merged into the Corporation or to which such sale or transfer was made,
as the case may be ("constituent entity"), or an affiliate of a
constituent entity, and assuming such holder failed to exercise his
rights of election, if any, as to the kind or amount of securities,
cash and other property receivable upon such consolidation, merger,
sale or transfer (provided that if the kind or amount of securities,
cash and other property receivable be upon such consolidation, merger,
sale or transfer is not the same for each share of Common Stock of the
Corporation held immediately prior to such consolidation, merger, sale
or transfer by other than a constituent entity or an affiliate thereof
in respect of which such rights of election shall not have been
exercised ("non-electing share"), then for the purpose of this
subsection (v) the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer
by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). If
necessary, appropriate adjustment shall be made in the application of
the provisions set forth herein with respect to the rights and
interests thereafter of the holders of shares of Series B Preferred
Stock, to the end that the provisions set forth herein shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in
relation to any shares of stock or other securities or property
thereafter deliverable on the conversion of the shares. The above
provisions shall similarly apply to successive consolidations, mergers,
sales or transfers. The Corporation shall not effect any such
consolidation, merger or sale, unless prior to or simultaneously with
the consummation thereof the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the
corporation purchasing such assets or other appropriate corporation or
entity shall assume, by written instrument, the obligation to deliver
to the holder of each share of Series B Preferred Stock such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to receive under this Section
8(e)(4).
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<PAGE> 46
(vi) The corporation may make such adjustments in the Conversion
Price, in addition to those required by subparagraphs (i) through (v)
of this Section 8(e)(4), as it considers to be advisable in order that
any event treated for federal income tax purposes as a dividend of
stock or stock rights shall not be taxable to the recipients.
(vii) No adjustment in the Conversion Price will be made for the
issuance of shares of capital stock to employees pursuant to the
Corporation's or any of its subsidiaries' stock option, stock ownership
or other benefit plans. No adjustment will be required to be made in
the Conversion Price until cumulative adjustments require an adjustment
of at least 1% of such Conversion Price.
(5) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of any
shares of Series B Preferred Stock, but the holder thereof will
receive in cash an amount equal to the value of such fractional
share of Common Stock based on the current market price (as
defined in subparagraph (iv) of Section 8(e)(4)). If more than one
share of Series B Preferred Stock shall be surrendered for
conversion at one time by the same holder, the number of full
shares issuable upon conversion thereof shall be computed on the
basis of the aggregate number of such shares so surrendered.
(6) PAYMENT OF TAXES. The Corporation shall pay any tax in respect of
the issue of stock certificates on conversion of shares of Series
B Preferred Stock. The Corporation shall not, however, be required
to pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of stock in any name other than
that of the holder of the shares converted, and the Corporation
shall not be required to issue or deliver any such stock
certificate unless and until the person or persons requesting the
issuance hereof shall have paid the Corporation the amount of any
such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(7) COMMON STOCK RESERVED FOR CONVERSION. The Corporation shall at all
times reserve and keep available out of its authorized and
unissued Common Stock or have available in its treasury
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<PAGE> 47
the full number of shares of Common Stock deliverable upon the
conversion of all outstanding shares of Series B Preferred Stock
and shall take all such action as may be required from time to
time in order that it may validly and legally issue fully paid and
non-assessable shares of Common Stock upon conversion of the
Series B Preferred Stock.
(8) NOTICE. In the event:
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock (other than a cash dividend payable
out of retained earnings); or
(ii) the Corporation shall authorize the issuance to holders of
its Common Stock of rights or warrants to subscribe for or purchase
Common Stock; or
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its outstanding
Common Stock, or a change in par value, or from par value to no par
value, or from no par value to par value) or of any consolidation or
merger to which the Corporation is a party or of the sale or transfer
of all or substantially all of the assets of the Corporation and for
which approval of any stockholders of the Corporation is required; or
(iv) of the voluntary or involuntary dissolution , liquidation or
winding up of the Corporation:
then, and in each event, the Corporation shall cause to be mailed to
each holder of Series B Preferred Stock, at his address as the same
shall appear on the books of the Corporation, as promptly as possible
but in any event at least fifteen days prior to the applicable date
hereinafter specified, a notice stating (A) the date on which a record
is to be take for the purpose of such dividend, distribution, rights or
warrants, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined, and the nature and amount
of such dividend, distribution, rights or warrants; or (B) the date on
which such reclassification , consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective,
and the date as of which it is expected that holders of Common Stock of
record shall be
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<PAGE> 48
entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger,
sale , transfer, dissolution, liquidation or winding up.
(f) "COMMON STOCK." For the purposes of Section 8(e), "Common Stock" shall
mean stock of the Corporation of any class, whether now or hereafter
authorized, which has the right to participate in the distribution of
either earnings or assets of the Corporation without limit as to the
amount of percentage, including, without limitation, the Common Stock.
In case by reason of the operation of paragraph (4) of Section 8(e) the
share of Series B Preferred Stock shall be convertible into any other
shares of stock or other securities or property of the Corporation or
of any other corporation, any reference herein to the conversion of
shares of Series B Preferred Stock pursuant to Section 8(e) shall be
deemed to refer to and include the conversion of shares of Series B
Preferred Stock into such other shares of stock or other securities or
property.
(g) NO SINKING FUND. No sinking fund will be established for the retirement
or redemption of shares of Series B Preferred Stock.
(h) LIQUIDATION RIGHTS: PRIORITY.
(i) The amount payable per share of Series B Preferred Stock in
the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs to the Corporation shall be $25.00, plus an
amount equal to all dividends accrued and unpaid thereon to the date of
payment.
(ii) Nothing contained herein shall be deemed to prevent
redemption of shares of the Series B Preferred Stock by the Corporation
in the manner provided in Section 8(d). Neither the merger nor
consolidation of the Corporation into or with any other corporation,
nor the merger or consolidation of any other corporation into or with
the Corporation, nor a sale , transfer or lease of all or any part of
the assets of the Corporation, shall be deemed to be a liquidation ,
dissolution or winding up of the Corporation within the meaning of this
Section 8(h).
(iii) No payment on account of such liquidation , dissolution or
winding up of the affairs of the Corporation shall be made to the
holders of any class or series of stock ranking on a parity with the
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<PAGE> 49
Series B Preferred Stock in respect of the distribution of assets,
unless there shall likewise be paid at the same time to the holders of
the Series B Preferred Stock like proportionate distributive amounts,
ratably, in proportion to the full distributive amounts to which they
and the holders of such parity stock are respectively entitled with
respect to such preferential distribution.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the
seal of the Corporation this 21st day of June, 1994.
/s/ Gary G. Clark
----------------------------------
Gary G. Clark
Chairman of the Board,
President and Chief
Executive Officer
/s/ L. Dwight Douce
----------------------------------
L. Dwight Douce
Secretary and Treasurer
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<PAGE> 1
Exhibit 10(a)
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 20th day of June, 1995, by and between FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF WOOSTER (which, together with any successor thereto which
executes and delivers the assumption agreement provided for in Section 11(a)
hereof or which otherwise becomes bound by all of the terms and provisions of
this Agreement by operation of law, is hereinafter referred to as the
"Association"), a subsidiary of FirstFederal Financial Services Corp (the
"Company") and GARY G. CLARK (the "Executive").
WHEREAS, the Executive is currently serving as the President and Chief
Executive Officer of the Association; and
WHEREAS, the Executive has made and will make a major contribution to
the Association in the position of President and Chief Executive Officer of the
Association; and
WHEREAS, the board of directors of the Association (the "Board of
Directors") recognizes that, the possibility of a change in control of the
Association or the Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Association, the Company and their respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Association to enter into this Agreement with the Executive in order to
assure continuity of management of the Association and to reinforce and
encourage the continued attention and dedication of the Executive to his
assigned duties without distraction in the face of potentially disruptive
circumstances arising from the possibility of a change in control of the
Association, although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Executive to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
-----------
(a) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of the Association or the Company within the
meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in effect
on the date hereof; or (ii) would be required to be reported in response to Item
1 of the current report on Form 8-K, as in effect on the date hereof, pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); (2) any person (as the term is used in Sections 13(d) and 14(d) of the
<PAGE> 2
Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly of securities of the Association or
the Company representing 20% or more of the Association's or the Company's
outstanding securities; or (3) individuals who are members of the board of
directors of the Association or the Company on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Company's
stockholders was approved by the nominating committee serving under an Incumbent
Board, shall be considered a member of the Incumbent Board. The term "Change in
Control" shall not include an acquisition of securities by an employee benefit
plan of the Association or the Company. In the application of 12 C.F.R. Part 574
to a determination of a Change in Control, determinations to be made by the OTS
or its Director under such regulations shall be made by the Board of Directors.
(b) The term "Date of Termination" means the earlier of (1) the date
upon which the Association gives notice to the Executive of the termination of
his employment with the Association or (2) the date upon which the Executive
ceases to serve as an employee of the Association.
(c) The term "Involuntarily Termination" means termination of the
employment of Executive without his express written consent, and shall include a
material diminution of or interference with the Executive's duties,
responsibilities and benefits as President and Chief Executive Officer of the
Association, including (without limitation) any of the following actions unless
consented to in writing by the Executive: (1) a change in the principal
workplace of the Executive to a location outside of a 30 mile radius from the
Association's headquarters office as of the date hereof; (2) a material demotion
of the Executive; (3) a material reduction in the number or seniority of other
Association personnel reporting to the Executive or a material reduction in the
frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Executive, other than as part of an
Association- or Company-wide reduction in staff; (4) a material adverse change
in the Executive's salary, perquisites, benefits, contingent benefits or
vacation, other than as part of an overall program applied uniformly and with
equitable effect to all members of the senior management of the Association or
the Company; and (5) a material permanent increase in the required hours of work
or the workload of the Executive. The term "Involuntary Termination" does not
include Termination for Cause or termination of employment due to retirement,
death, disability or suspension or temporary or permanent prohibition from
participation in the conduct of the Association's affairs under Section 8 of the
Federal Deposit Insurance Act ("FDIA").
(d) The terms "Termination for Cause" and "Terminated For Cause" mean
termination of the employment of the Executive because of the Executive's
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. No act, or failure to act, on the Executive part
shall be considered "willful" unless the Executive has acted (or failed to act)
with an absence of good faith and without reasonable belief that the Executive's
action or failure to act was in the best interest of the Association.
Notwithstanding the foregoing, the Executive shall not be deemed
2
<PAGE> 3
to have been Terminated for Cause unless and until there shall have been
delivered to the Executive a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Board of Directors of the Association at a meeting of the Board called and held
for such purpose (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board), stating that in the good faith opinion of the Board the Executive has
engaged in described in the preceding sentence and specifying the particulars
thereof in detail.
2. TERM. The term of this Agreement shall be a period of three years
commencing on the date first above written (the "Commencement Date"), subject to
earlier termination as provided herein. Beginning on the first anniversary of
the Commencement Date, and on each anniversary thereafter, the term of this
Agreement shall be extended for a period of one year in addition to the
then-remaining term, PROVIDED THAT (i) neither the Executive nor the Association
has given notice to the other in writing at least 90 days prior to such
anniversary that the term of this Agreement shall not be extended further; and
(ii) prior to such anniversary, the Board of Directors of the Association
explicitly reviews and approves the extension. Reference herein to the term of
this Agreement shall refer to both such initial term and such extended terms.
3. EMPLOYMENT. The Executive is employed as the President and Chief
Executive Officer of the Association. As President and Chief Executive Officer,
Executive shall render administrative and management services as are customarily
performed by persons situated in similar executive capacities, and shall have
such other powers and duties of an officer of the Association as the Board of
Directors may prescribe from time to time, provided that such duties are
consistent with the Executive's position as President and Chief Executive
Officer. The Executive shall continue to devote his best efforts and
substantially all his business time and attention to the business and affairs of
the Association and its subsidiaries and affiliated companies.
4. COMPENSATION.
(a) SALARY. The Association agrees to pay the Executive during the
term of this Agreement the salary established by the Board of Directors, which
shall be at least the Executive's salary in effect as of the Commencement Date.
The Executive's salary shall be payable not less frequently than monthly and not
later than the tenth day following the expiration of the month in question. The
amount of the Executive's salary shall be reviewed by the Board of Directors not
less often than annually, beginning not later than the first anniversary of the
Commencement Date. Adjustments in salary or other compensation shall not limit
or reduce any other obligation of the Association under this Agreement. The
Executive's salary in effect from time to time during the term of this Agreement
shall not thereafter be reduced.
(b) DISCRETIONARY BONUSES. The Executive shall be entitled to
participate in an equitable manner with all other executive officers of the
Association in discretionary bonuses as authorized and declared by the Board of
Directors to its executive Executives. No other compensation provided for in
this Agreement shall be deemed a substitute for the Executive's right to
participate in such bonuses when and as declared by the Board of Directors.
3
<PAGE> 4
(c) EXPENSES. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Association, PROVIDED
THAT the Executive properly accounts for such expenses in accordance with such
policies and procedures.
5. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. The
Executive shall be entitled to participate in all plans relating to stock
options, pension, thrift, profit-sharing, group life insurance, medical and
dental coverage, education, cash bonuses, and other retirement or employee
benefits or combinations thereof, that are now or hereafter maintained for the
benefit of the Association's executive employees or its employees generally.
(b) FRINGE BENEFITS. The Executive shall be eligible to
participate in, and receive benefits under, any other fringe benefit plans which
are or may become applicable to the Association's executive officers.
6. VACATIONS; LEAVE. The Executive shall be entitled to annual paid
vacation in accordance with the policies established by the Association's Board
of Directors for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors of the Association may determine in its discretion.
7. TERMINATION OF EMPLOYMENT.
(a) INVOLUNTARY TERMINATION. The Board of Directors may terminate
the Executive's employment at any time, but, except in the case of Termination
for Cause, termination of employment shall not prejudice the Executive's right
to compensation or other benefits under this Agreement. In the event of
Involuntary Termination other than in connection with or within 12 months after
a Change in Control, (1) the Association shall pay to the Executive during the
remaining term of this Agreement, his salary at the rate in effect immediately
prior to the Date of Termination, payable in such manner and at such times as
such salary would have been payable to the Executive under Section 2 if the
Executive had continued to be employed by the Association, and (2) the
Association shall provide to the Executive during the remaining term of this
Agreement health benefits as maintained by the Association for the benefit of
its executive officers from time to time during the remaining term of the
Agreement or substantially the same health benefits as the Association
maintained for its executive officers immediately prior to the Date of
Termination.
(b) TERMINATION FOR CAUSE. In the event of Termination for Cause,
the Association shall pay the Executive his salary through the Date of
Termination, and the Association shall have no further obligation to the
Executive under this Agreement.
(c) VOLUNTARY TERMINATION. The Executive's employment may be
voluntarily terminated by the Executive at any time upon 90 days written notice
to the Association or upon such shorter period as may be agreed upon between the
Executive and the Board of Directors
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of the Association. In the event of such voluntary termination, the Association
shall be obligated to continue to pay the Executive his salary and benefits
through the Date of Termination, at the time such payments are due, and the
Association shall have no further obligation to the Executive under this
Agreement.
(d) CHANGE IN CONTROL. In the event of Involuntary Termination in
connection with or within 12 months after a Change in Control which occurs at
any time while the Executive is employed under this Agreement, the Association
shall, subject to Section 8 of this Agreement, (1) pay to the Executive in a
lump sum in cash within 25 business days after the Date of Termination an amount
equal to 299% of the Executive's "base amount" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"); and (2) provide to the
Executive during the remaining term of this Agreement such health benefits as
are maintained for executive officers of the Association from time to time
during the remaining term of this Agreement or substantially the same health
benefits as the Association maintained for its executive officers immediately
prior to the Change in Control.
(e) DEATH; DISABILITY. In the event of the death of the Executive
while employed under this Agreement and prior to any termination of employment,
the Executive's estate, or such person as the Executive may have previously
designated in writing, shall be entitled to receive from the Association the
salary of the Executive through the last day of the calendar month in which the
Executive died. If the Executive becomes disabled as defined in the
Association's then current disability plan or if the Executive is otherwise
unable to serve as President and Chief Executive Officer, the Executive shall be
entitled to receive group and other disability income benefits of the type then
provided by the Association for executive officers.
(f) TEMPORARY SUSPENSION OR PROHIBITION. If the Executive is
suspended and/or temporarily prohibited from participating in the conduct of the
Association's affairs by a notice served under Section 8(e)(3) or (g)(1) of the
FDIA, 12 U.S.C. 1818(e)(3) and (g)(1), the Association's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (1) pay the Executive all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
(g) PERMANENT SUSPENSION OR PROHIBITION. If the Executive is
removed and/or permanently prohibited from participating in the conduct of the
Association's affairs by an order issued under Section 8(e)(4) or (g)(1) of the
FDIA, 12 U.S.C. 1818(e)(4) and (g)(1), all obligations of the Association under
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) DEFAULT OF THE ASSOCIATION. If the Association is in default
(as defined in Section 3(x)(1) of the FDIA), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the contracting parties.
(i) TERMINATION BY REGULATORS. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Association:
(1) by the Director of the Office of Thrift
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Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Association under the
authority contained in Section 13(c) of the FDIA; or (2) by the Director or his
or her designee, at the time the Director or his or her designee approves a
supervisory merger to resolve problems related to operation of the Association
or when the Association is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by any such action.
8. CERTAIN REDUCTION OF PAYMENTS BY THE ASSOCIATION.
(a) Notwithstanding any other provision of this Agreement, if
payments under this Agreement, together with any other payments received or to
be received by the Executive in connection with a Change in Control would cause
any amount to be nondeductible by the Association for federal income tax
purposes pursuant to Section 280G of the Code, then benefits under this
Agreement shall be reduced (not less than zero) to the extent necessary so as to
maximize payments to the Executive without causing any amount to become
nondeductible by the Association or the Company. The Executive shall determine
the allocation of such reduction among payments to the Executive.
(b) Any payments made to the Executive pursuant to this Agreement,
or otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. 1828(k) and any regulations promulgated thereunder.
9. NO MITIGATION. The Executive shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Executive as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. ATTORNEYS FEES. In the event the Association exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Association has failed to make timely payment of any amounts owed to
the Executive under this Agreement, the Executive shall be entitled to
reimbursement for all reasonable costs, including attorneys' fees, incurred in
challenging such termination or collecting such amounts. Such reimbursement
shall be in addition to all rights to which the Executive is otherwise entitled
under this Agreement.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Association shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Association, by an
assumption agreement in form and substance satisfactory to the Executive, to
expressly assume and agree
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to perform this Agreement in the same manner and to the same extent that the
Association would be required to perform it if no such succession or assignment
had taken place. Failure of the Association to obtain such an assumption
agreement prior to the effectiveness of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Executive to compensation
from the Association in the same amount and on the same terms as the
compensation pursuant to Section 7(d) hereof. For purposes of implementing the
provisions of this Section 11(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Executive hereunder shall inure
to the benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees . If the Executive should die while any amounts would
still be payable to the Executive hereunder if the Executive had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's devisee, legatee
or other designee or if there is no such designee, to the Executive's estate.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Association at its home
office, to the attention of the Board of Directors with a copy to the Secretary
of the Association, or, if to the Executive, to such home or other address as
the Executive has most recently provided in writing to the Association.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. HEADINGS. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by and is to be
construed and enforced in accordance with the laws of the United States to the
extent applicable and otherwise by the laws of the State of Ohio.
17. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH
MAY BE ENFORCED BY THE PARTIES.
Attest: First Federal Savings and Loan
Association
/s/ Connie S. Strock /s/ Daniel H. Plumly
- ------------------------- ---------------------------------------
Secretary (Assistant)
By: Daniel H. Plumly
Its: Benefits & Compensation
Committee Member
Executive
/s/ Gary G. Clark
---------------------------------------
Gary G. Clark, President and
Chief Executive Officer
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Exhibit 10(b)
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 20th day of June 1995, by and between FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF WOOSTER (which, together with any successor thereto which
executes and delivers the assumption agreement provided for in Section 11(a)
hereof or which otherwise becomes bound by all of the terms and provisions of
this Agreement by operation of law, is hereinafter referred to as the
"Association"), a subsidiary of FirstFederal Financial Services Corp (the
"Company") and L. DWIGHT DOUCE (the "Executive").
WHEREAS, the Executive is currently serving as the Executive Vice
President and Chief Financial Officer of the Association; and
WHEREAS, the Executive has made and will make a major contribution to
the Association in the position of Executive Vice President and Chief Financial
Officer of the Association; and
WHEREAS, the board of directors of the Association (the "Board of
Directors") recognizes that, the possibility of a change in control of the
Association or the Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Association, the Company and their respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Association to enter into this Agreement with the Executive in order to
assure continuity of management of the Association and to reinforce and
encourage the continued attention and dedication of the Executive to his
assigned duties without distraction in the face of potentially disruptive
circumstances arising from the possibility of a change in control of the
Association, although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Executive to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. DEFINITIONS.
(a) The term "Change in Control" means (1) an event of a nature
that (i) results in a change in control of the Association or the Company within
the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574 as in
effect on the date hereof; or (ii) would be required to be reported in response
to Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
<PAGE> 2
"Exchange Act"); (2) any person (as the term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the
Association or the Company representing 20% or more of the Association's or the
Company's outstanding securities; or (3) individuals who are members of the
board of directors of the Association or the Company on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Company's stockholders was approved by the nominating committee serving
under an Incumbent Board, shall be considered a member of the Incumbent Board.
The term "Change in Control" shall not include an acquisition of securities by
an employee benefit plan of the Association or the Company. In the application
of 12 C.F.R. Part 574 to a determination of a Change in Control, determinations
to be made by the OTS or its Director under such regulations shall be made by
the Board of Directors.
(b) The term "Date of Termination" means the earlier of (1) the
date upon which the Association gives notice to the Executive of the termination
of his employment with the Association or (2) the date upon which the Executive
ceases to serve as an employee of the Association.
(c) The term "Involuntarily Termination" means termination of
the employment of Executive without his express written consent, and shall
include a material diminution of or interference with the Executive's duties,
responsibilities and benefits as Executive Vice President and Chief Financial
Officer of the Association, including (without limitation) any of the following
actions unless consented to in writing by the Executive: (1) a change in the
principal workplace of the Executive to a location outside of a 30 mile radius
from the Association's headquarters office as of the date hereof; (2) a material
demotion of the Executive; (3) a material reduction in the number or seniority
of other Association personnel reporting to the Executive or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Executive, other than as
part of an Association- or Company-wide reduction in staff; (4) a material
adverse change in the Executive's salary, perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of the
Association or the Company; and (5) a material permanent increase in the
required hours of work or the workload of the Executive. The term "Involuntary
Termination" does not include Termination for Cause or termination of employment
due to retirement, death, disability or suspension or temporary or permanent
prohibition from participation in the conduct of the Association's affairs under
Section 8 of the Federal Deposit Insurance Act ("FDIA").
(d) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Executive because of the Executive's
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. No act, or failure to act, on the Executive part
shall be considered "willful" unless the Executive has acted (or failed to act)
with an absence of good faith and without reasonable belief that the Executive's
action or failure to act was in the best
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interest of the Association. Notwithstanding the foregoing, the Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to the Executive a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Board of Directors of the Association at a meeting of the Board called and held
for such purpose (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board), stating that in the good faith opinion of the Board the Executive has
engaged in described in the preceding sentence and specifying the particulars
thereof in detail.
2. TERM. The term of this Agreement shall be a period of three years
commencing on the date first above written (the "Commencement Date"), subject to
earlier termination as provided herein. Beginning on the first anniversary of
the Commencement Date, and on each anniversary thereafter, the term of this
Agreement shall be extended for a period of one year in addition to the
then-remaining term, PROVIDED THAT (i) neither the Executive nor the Association
has given notice to the other in writing at least 90 days prior to such
anniversary that the term of this Agreement shall not be extended further; and
(ii) prior to such anniversary, the Board of Directors of the Association
explicitly reviews and approves the extension. Reference herein to the term of
this Agreement shall refer to both such initial term and such extended terms.
3. EMPLOYMENT. The Executive is employed as the Executive Vice President
and Chief Financial Officer of the Association. As Executive Vice President and
Chief Financial Officer, Executive shall render administrative and management
services as are customarily performed by persons situated in similar executive
capacities, and shall have such other powers and duties of an officer of the
Association as the Board of Directors may prescribe from time to time, provided
that such duties are consistent with the Executive's position as Executive Vice
President and Chief Financial Officer. The Executive shall continue to devote
his best efforts and substantially all his business time and attention to the
business and affairs of the Association and its subsidiaries and affiliated
companies.
4. COMPENSATION.
(a) SALARY. The Association agrees to pay the Executive during
the term of this Agreement the salary established by the Board of Directors,
which shall be at least the Executive's salary in effect as of the Commencement
Date. The Executive's salary shall be payable not less frequently than monthly
and not later than the tenth day following the expiration of the month in
question. The amount of the Executive's salary shall be reviewed by the Board of
Directors not less often than annually, beginning not later than the first
anniversary of the Commencement Date. Adjustments in salary or other
compensation shall not limit or reduce any other obligation of the Association
under this Agreement. The Executive's salary in effect from time to time during
the term of this Agreement shall not thereafter be reduced.
(b) DISCRETIONARY BONUSES. The Executive shall be entitled to
participate in an equitable manner with all other executive officers of the
Association in discretionary bonuses as authorized and declared by the Board of
Directors to its executive Executives. No other compensation provided for in
this Agreement shall be deemed a substitute for the Executive's right to
participate in such bonuses when and as declared by the Board of Directors.
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<PAGE> 4
(c) EXPENSES. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Association, PROVIDED
THAT the Executive properly accounts for such expenses in accordance with such
policies and procedures.
5. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. The
Executive shall be entitled to participate in all plans relating to stock
options, pension, thrift, profit-sharing, group life insurance, medical and
dental coverage, education, cash bonuses, and other retirement or employee
benefits or combinations thereof, that are now or hereafter maintained for the
benefit of the Association's executive employees or its employees generally.
(b) FRINGE BENEFITS. The Executive shall be eligible to
participate in, and receive benefits under, any other fringe benefit plans which
are or may become applicable to the Association's executive officers.
6. VACATIONS; LEAVE. The Executive shall be entitled to annual paid
vacation in accordance with the policies established by the Association's Board
of Directors for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors of the Association may determine in its discretion.
7. TERMINATION OF EMPLOYMENT.
(a) INVOLUNTARY TERMINATION. The Board of Directors may
terminate the Executive's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Executive's right to compensation or other benefits under this Agreement. In the
event of Involuntary Termination other than in connection with or within 12
months after a Change in Control, (1) the Association shall pay to the Executive
during the remaining term of this Agreement, his salary at the rate in effect
immediately prior to the Date of Termination, payable in such manner and at such
times as such salary would have been payable to the Executive under Section 2 if
the Executive had continued to be employed by the Association, and (2) the
Association shall provide to the Executive during the remaining term of this
Agreement health benefits as maintained by the Association for the benefit of
its executive officers from time to time during the remaining term of the
Agreement or substantially the same health benefits as the Association
maintained for its executive officers immediately prior to the Date of
Termination.
(b) TERMINATION FOR CAUSE. In the event of Termination for
Cause, the Association shall pay the Executive his salary through the Date of
Termination, and the Association shall have no further obligation to the
Executive under this Agreement.
(c) VOLUNTARY TERMINATION. The Executive's employment may be
voluntarily terminated by the Executive at any time upon 90 days written notice
to the Association or upon such shorter period as may be agreed upon between the
Executive and the Board of Directors
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<PAGE> 5
of the Association. In the event of such voluntary termination, the Association
shall be obligated to continue to pay the Executive his salary and benefits
through the Date of Termination, at the time such payments are due, and the
Association shall have no further obligation to the Executive under this
Agreement.
(d) CHANGE IN CONTROL. In the event of Involuntary Termination
in connection with or within 12 months after a Change in Control which occurs at
any time while the Executive is employed under this Agreement, the Association
shall, subject to Section 8 of this Agreement, (1) pay to the Executive in a
lump sum in cash within 25 business days after the Date of Termination an amount
equal to 299% of the Executive's "base amount" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"); and (2) provide to the
Executive during the remaining term of this Agreement such health benefits as
are maintained for executive officers of the Association from time to time
during the remaining term of this Agreement or substantially the same health
benefits as the Association maintained for its executive officers immediately
prior to the Change in Control.
(e) DEATH; DISABILITY. In the event of the death of the
Executive while employed under this Agreement and prior to any termination of
employment, the Executive's estate, or such person as the Executive may have
previously designated in writing, shall be entitled to receive from the
Association the salary of the Executive through the last day of the calendar
month in which the Executive died. If the Executive becomes disabled as defined
in the Association's then current disability plan or if the Executive is
otherwise unable to serve as Executive Vice President and Chief Financial
Officer, the Executive shall be entitled to receive group and other disability
income benefits of the type then provided by the Association for executive
officers.
(f) TEMPORARY SUSPENSION OR PROHIBITION. If the Executive is
suspended and/or temporarily prohibited from participating in the conduct of the
Association's affairs by a notice served under Section 8(e)(3) or (g)(1) of the
FDIA, 12 U.S.C. Sections 1818(e)(3) and (g)(1), the Association's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (1) pay the Executive all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
(g) PERMANENT SUSPENSION OR PROHIBITION. If the Executive is
removed and/or permanently prohibited from participating in the conduct of the
Association's affairs by an order issued under Section 8(e)(4) or (g)(1) of the
FDIA, 12 U.S.C. Sections 1818(e)(4) and (g)(1), all obligations of the
Association under this Agreement shall terminate as of the effective date of the
order, but vested rights of the contracting parties shall not be affected.
(h) DEFAULT OF THE ASSOCIATION. If the Association is in default
(as defined in Section 3(x)(1) of the FDIA), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the contracting parties.
(i) TERMINATION BY REGULATORS. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for
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the continued operation of the Association: (1) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the Association under
the authority contained in Section 13(c) of the FDIA; or (2) by the Director or
his or her designee, at the time the Director or his or her designee approves a
supervisory merger to resolve problems related to operation of the Association
or when the Association is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by any such action.
8. CERTAIN REDUCTION OF PAYMENTS BY THE ASSOCIATION.
(a) Notwithstanding any other provision of this Agreement, if
payments under this Agreement, together with any other payments received or to
be received by the Executive in connection with a Change in Control would cause
any amount to be nondeductible by the Association for federal income tax
purposes pursuant to Section 280G of the Code, then benefits under this
Agreement shall be reduced (not less than zero) to the extent necessary so as to
maximize payments to the Executive without causing any amount to become
nondeductible by the Association or the Company. The Executive shall determine
the allocation of such reduction among payments to the Executive.
(b) Any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
9. NO MITIGATION. The Executive shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Executive as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. ATTORNEYS FEES. In the event the Association exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Association has failed to make timely payment of any amounts owed to
the Executive under this Agreement, the Executive shall be entitled to
reimbursement for all reasonable costs, including attorneys' fees, incurred in
challenging such termination or collecting such amounts. Such reimbursement
shall be in addition to all rights to which the Executive is otherwise entitled
under this Agreement.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Association shall require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Association, by an
assumption
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agreement in form and substance satisfactory to the Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Association would be required to perform it if no such
succession or assignment had taken place. Failure of the Association to obtain
such an assumption agreement prior to the effectiveness of any such succession
or assignment shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Association in the same amount and on the
same terms as the compensation pursuant to Section 7(d) hereof. For purposes of
implementing the provisions of this Section 11(a), the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable to the Executive hereunder if the Executive had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee or other designee or if there is no such designee, to the Executive's
estate.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Association at its home
office, to the attention of the Board of Directors with a copy to the Secretary
of the Association, or, if to the Executive, to such home or other address as
the Executive has most recently provided in writing to the Association.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. HEADINGS. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by and is to be
construed and enforced in accordance with the laws of the United States to the
extent applicable and otherwise by the laws of the State of Ohio.
17. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: First Federal Savings and Loan
Association of Wooster
/s/ Connie S. Strock /s/ Daniel H. Plumly
- ----------------------- ---------------------------------
Assistant Secretary
By: Daniel H. Plumly
Its: Benefits & Compensation
Committee Member
Executive
/s/ L. Dwight Douce
---------------------------------
L. Dwight Douce, Executive Vice President
and Chief Financial Officer
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Exhibit 10(c)
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 18th of June, 1996, by and between FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF WOOSTER (which, together with any successor thereto which
executes and delivers the assumption agreement provided for in Section 11(a)
hereof or which otherwise becomes bound by all of the terms and provisions of
this Agreement by operation of law, is hereinafter referred to as the
"Association"), a subsidiary of FirstFederal Financial Services Corp (the
"Company") and JAMES J. LITTLE (the "Executive").
WHEREAS, the Executive is currently serving as the Executive Vice
President and Chief Financial Officer of the Association; and
WHEREAS, the Executive has made and will make a major contribution to
the Association in the position of Executive Vice President and Chief Financial
Officer of the Association; and
WHEREAS, the board of directors of the Association (the "Board of
Directors") recognizes that, the possibility of a change in control of the
Association or the Company may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Association, the Company and their respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Association to enter into this Agreement with the Executive in order to
assure continuity of management of the Association and to reinforce and
encourage the continued attention and dedication of the Executive to his
assigned duties without distraction in the face of potentially disruptive
circumstances arising from the possibility of a change in control of the
Association, although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Executive to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing. and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. DEFINITIONS.
(a) The term "Change in Control" means (1) an event of a nature
that (i) results in a change in control of the. Association or the Company
within the meaning of the Home Owners' Loan Act of 1933 and 12 C.F.R. Part 574
as in effect on the date hereof; or (ii) would be required to be reported in
response to Item 1 of the current report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(the
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"Exchange Act"); (2) any person (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 1
3d-3 under the Exchange Act), directly or indirectly of securities of the
Association or the Company representing 20% or more of the Association's or the
Company's outstanding securities; or (3) individuals who are members of the
board of directors of the Association or the Company on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Company's stockholders was approved by the nominating committee serving
under an Incumbent Board, shall be considered a member of the Incumbent Board.
The term "Change in Control" shall not include an acquisition of securities by
an employee benefit plan of the Association or the Company. In the application
of 12 C.F.R. Part 574 to a determination of a Change in Control, determinations
to be made by the OTS or its Director under such regulations shall be made by
the Board of Directors.
(b) The term "Date of Termination" means the earlier of (1) the
date upon which the Association gives notice to the Executive of the termination
of his employment with the Association or (2) the date upon which the Executive
ceases to serve as an employee of the Association.
(c) The term "Involuntarily Termination" means termination of
the employment of Executive without his express written consent, and shall
include a material diminution of or interference with the Executive's duties,
responsibilities and benefits as Executive Vice President and Chief Financial
Officer of the Association, including (without limitation) any of the following
actions unless consented to in writing by the Executive: (1) a change in the
principal workplace of the Executive to a location outside of a 30 mile radius
from the Association's headquarters office as of the date hereof; (2) a material
demotion of the Executive; (3) a material reduction in the number or seniority
of other Association personnel reporting to the Executive or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Executive, other than as
part of an Association- or Company-wide reduction in staff; (4) a material
adverse change in the Executive's salary, perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of the
Association or the Company; and (5) a material permanent increase in the
required hours of work or the workload of the Executive. The term "Involuntary
Termination" does not include Termination for Cause or termination of employment
due to retirement, death, disability or suspension or temporary or permanent
prohibition from participation in the conduct of the Association's affairs under
Section 8 Qf the Federal Deposit Insurance Act ("FDIA").
(d) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Executive because of the Executive's
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. No act, or failure to act, on the Executive part
shall be considered "willful"
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unless the Executive has acted (or failed to act) with an absence of good faith
and without reasonable belief that the Executive's action or failure to act was
in the best interest of the Association. Notwithstanding the foregoing, the
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to the Executive a copy of a resolution, duly
adopted by the affirmative vote of not less than a majority of the entire
membership of the Board of Directors of the Association at a meeting of the
Board called and held for such purpose (after reasonable notice to the Executive
and an opportunity for the Executive, together with the Executive's counsel, to
be heard before the Board), stating that in the good faith opinion of the Board
the Executive has engaged in described in the preceding sentence and specifying
the particulars thereof in detail.
2. TERM. The term of this Agreement shall be a period of three years
commencing on the date first above written (the "Commencement Date"), subject
to earlier termination as provided herein. Beginning on the first anniversary of
the Commencement Date, and on each anniversary thereafter, the term of this
Agreement shall be extended for a period of one year in addition to the
then-remaining term, PROVIDED THAT (i) neither the Executive nor the Association
has given notice to the other in writing at least 90 days prior to such
anniversary that the term of this Agreement shall not be extended further; and
(ii) prior to such anniversary, the Board of Directors of the Association
explicitly reviews and approves the extension. Reference herein to the term of
this Agreement shall refer to both such initial term and such extended terms.
3. EMPLOYMENT. The Executive is employed as the Executive Vice President
and Chief Financial Officer of the Association. As Executive Vice President and
Chief Financial Officer, Executive shall render administrative and management
services as are customarily performed by persons situated in similar executive
capacities, and shall have such other powers and duties of an officer of the
Association as the Board of Directors may prescribe from time to time, provided
that such duties are consistent with the Executive's position as Executive Vice
President and Chief Financial Officer. The Executive shall continue to devote
his best efforts and substantially all his business time and attention to the
business and affairs of the Association and its subsidiaries and affiliated
companies.
4. COMPENSATION.
(a) SALARY. The Association agrees to pay the Executive during
the term of this Agreement the salary established by the Board of Directors,
which shall be at least the Executive' s salary in effect as of the Commencement
Date. The Executive's salary shall be payable not less frequently than monthly
and not later than the tenth day following the expiration of the month in
question. The amount of the Executive's salary shall be reviewed by the Board of
Directors not less often than annually, beginning not later than the first
anniversary of the Commencement Date. Adjustments in salary or other
compensation shall not limit or reduce any other obligation of the Association
under this Agreement. The Executive's salary in effect from time to time during
the term of this Agreement shall not thereafter be reduced.
(b) DISCRETIONARY BONUSES. The Executive shall be entitled to
participate in an equitable manner with all other executive officers of the
Association in discretionary bonuses as
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authorized and declared by the Board of Directors to its executive Executives.
No other compensation provided for in this Agreement shall be deemed a
substitute for the Executive's right to participate in such bonuses when and as
declared by the Board of Directors.
The Executive shall also be entitled to a bonus of $10,000 for each completed
merger or acquisition transaction, including other financial institutions,
branches of financial institutions or other financial service entities.
(c) EXPENSES. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Association, PROVIDED
THAT the Executive properly accounts for such expenses in accordance with such
policies and procedures.
5. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. The
Executive shall be entitled to participate in all plans relating to stock
options, pension, thrift, profit-sharing, group life insurance, medical and
dental coverage, education, cash bonuses, and other retirement or employee
benefits or combinations thereof, that are now or hereafter maintained for the
benefit of the Association's executive employees or its employees generally.
(b) FRINGE BENEFITS. The Executive shall be eligible to
participate in, and receive benefits under, any other fringe benefit plans which
are or may become applicable to the Association's executive officers.
6. VACATIONS; LEAVE. The Executive shall be entitled to annual paid
vacation in accordance with the policies established by the Association's Board
of Directors for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors of the Association may determine in its discretion.
7. TERMINATION OF EMPLOYMENT.
(a) INVOLUNTARY TERMINATION. The Board of Directors may
terminate the Executive's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Executive's right to compensation or other benefits under this Agreement. In the
event of Involuntary Termination other than in connection with or within 12
months after a Change in Control, (1) the Association shall pay to the Executive
during the remaining term of this Agreement, his salary at the rate in effect
immediately prior to the Date of Termination, payable in such manner and at such
times as such salary would have been payable to the Executive under Section 2 if
the Executive had continued to be employed by the Association, and (2) the
Association shall provide to the Executive during the remaining term of this
Agreement health benefits as maintained by the Association for the benefit of
its executive officers from time to time during the remaining term of the
Agreement or substantially the same
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health benefits as the Association maintained for its executive officers
immediately prior to the Date of Termination.
(b) TERMINATION FOR CAUSE. In the event of Termination for
Cause, the Association shall pay the Executive his salary through the Date of
Termination, and the Association shall have no further obligation to the
Executive under this Agreement.
(c) VOLUNTARY TERMINATION. The Executive's employment may be
voluntarily terminated by the Executive at any time upon 90 days written notice
to the Association or upon such shorter period as may be agreed upon between the
Executive and the Board of Directors of the Association. In the event of such
voluntary termination, the Association shall be obligated to continue to pay the
Executive his salary and benefits through the Date of Termination, at the time
such payments are due, and the Association shall have no further obligation to
the Executive under this Agreement.
(d) CHANGE IN CONTROL. In the event of Involuntary Termination
in connection with or within 12 months after a Change in Control which occurs at
any time while the Executive is employed under this Agreement, the Association
shall, subject to Section 8 of this Agreement, (1) pay to the Executive in a
lump sum in cash within 25 business days after the Date of Termination an amount
equal to 299% of the Executive's "base amount" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"); and (2) provide to the
Executive during the remaining term of this Agreement such health benefits as
are maintained for executive officers of the Association from time to time
during the remaining term of this Agreement or substantially the same health
benefits as the Association maintained for its executive officers immediately
prior to the Change in Control.
(e) DEATH; DISABILITY. In the event of the death of the
Executive while employed under this Agreement and prior to any termination of
employment, the Executive's estate, or such person as the Executive may have
previously designated in writing, shall be entitled to receive from the
Association the salary of the Executive through the last day of the calendar
month in which the Executive died. If the Executive becomes disabled as defined
in the Association's then current disability plan or if the Executive is
otherwise unable to serve as Executive Vice President and Chief Financial
Officer, the Executive shall be entitled to receive group and other disability
income benefits of the type then provided by the Association for executive
officers.
(f) TEMPORARY SUSPENSION OR PROHIBITION. If the Executive is
suspended and/or temporarily prohibited from participating in the conduct of the
Association's affairs by a notice served under Section 8(e)(3) or (g)(1) of the
FDIA, 12 U.S.C. Sections 1818(e)(3) and (g)(1), the Association's obligations
under this Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Executive all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
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(g) PERMANENT SUSPENSION OR PROHIBITION. If the Executive is
removed and/or permanently prohibited from participating in the conduct of the
Association's affairs by an order issued under Section 8(e)(4) or (g)(1) of the
FDIA, 12 U.S.C. Sections 1818(e)(4) and (g)(1), all obligations of the
Association under this Agreement shall terminate as of the effective date of the
order, but vested rights of the contracting parties shall not be affected.
(h) DEFAULT OF THE ASSOCIATION. If the Association is in default
(as defined in Section 3(x)(1) of the FDIA), all obligations under this
Agreement shall terminate as of the date of default, but this provision shall
not affect any vested rights of the contracting parties.
(i) TERMINATION BY REGULATORS. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Association:
(1) by the Director of the Office of Thrift Supervision (the "Director") or his
or her designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Association under the authority contained in Section 13(c)
of the FDIA; or (2) by the Director or his or her designee, at the time the
Director or his or her designee approves a supervisory merger to resolve
problems related to operation of the Association or when the Association is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by any
such action.
8. CERTAIN REDUCTION OF PAYMENTS BY THE ASSOCIATION.
(a) Notwithstanding any other provision of this Agreement, if
payments under this Agreement, together with any other payments received or to
be received by the Executive in connection with a Change in Control would cause
any amount to be nondeductible by the Association for federal income tax
purposes pursuant to Section 280G of the Code, then benefits under this
Agreement shall be reduced (not less than zero) to the extent necessary so as to
maximize payments to the Executive without causing any amount to become
nondeductible by the Association or the Company. The Executive shall determine
the allocation of such reduction among payments to the Executive.
(b) Any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
9. NO MITIGATION. The Executive shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment
or benefit provided for in this Agreement be reduced by any compensation earned
by the Executive as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. ATTORNEYS FEES. In the event the Association exercises its right of
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by any
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such court or arbitrator that the Association has failed to make timely payment
of any amounts owed to the Executive under this Agreement, the Executive shall
be entitled to reimbursement for all reasonable costs, including attorneys'
fees, incurred in challenging such termination or collecting such amounts. Such
reimbursement shall be in addition to all rights to which the Executive is
otherwise entitled under this Agreement.
11. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Association shall require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Association, by an
assumption agreement in form and substance satisfactory to the Executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Association would be required to perform it if no such
succession or assignment had taken place. Failure of the Association to obtain
such an assumption agreement prior to the effectiveness of any such succession
or assignment shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Association in the same amount and on the
same terms as the compensation pursuant to Section 7(d) hereof. For purposes of
implementing the provisions of this Section 11(a), the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable to the Executive hereunder if the Executive had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee or other designee or if there is no such designee, to the Executive's
estate.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Association at its home
office, to the attention of the Board of Directors with a copy to the Secretary
of the Association, or, if to the Executive, to such home or other address as
the Executive has most recently provided in writing to the Association.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. HEADINGS. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
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15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by and is to be
construed and enforced in accordance with the laws of the United States to the
extent applicable and otherwise by the laws of the State of Ohio.
17. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH
MAY BE ENFORCED BY THE PARTIES.
Attest: First Federal Savings and Loan
Association of Wooster
/s/ L. Dwight Douce /s/ Gary G. Clark
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Secretary
By: Gary G. Clark
Its: Chairman
Executive
/s/ James J. Little
---------------------------------
James J. Little, Executive Vice President
and Chief Financial Officer
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Exhibit 10(d)
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this 3rd day
of April, 1996, by and between MOBILE CONSULTANTS, INC. ("MCI"), an Ohio
corporation and subsidiary of FirstFederal Financial Services Corp (the
"Company"), and RONALD A. JAMES, JR., (the "Executive"), effective for all
purposes and in all respects at the Closing as such term is defined in the
Agreement of Merger and Plan of Reorganization dated February 26, 1996, by and
between the Company, Holding Acquisition Corp., MCI, and Executive (the "Merger
Agreement").
WHEREAS, prior to Closing, Executive was President and a member of the
Board of Directors of MCI in addition to being the sole shareholder of MCI;
WHEREAS, pursuant to the Merger Agreement, Company is acquiring all of
the issued and outstanding capital stock of MCI;
WHEREAS, Executive has unique talents and experience which are of value
to MCI;
WHEREAS, MCI desires to employ Executive in the capacity of President of
MCI on and after the Closing on the terms and conditions set forth herein;
WHEREAS, Executive desires to be employed by MCI in the aforesaid
capacity; and
WHEREAS, Executive and MCI desire to set forth in writing the terms and
conditions of their agreements and understandings.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties intending to be legally bound, agree as follows:
1. TERM. The term of this Agreement shall be a period of three (3) years
commencing on the Closing Date (the "Commencement Date"), subject to earlier
termination as provided herein. Beginning on the third anniversary of the
Commencement Date, and on each anniversary thereafter, the term of this
Agreement shall be extended for a period of one year, PROVIDED THAT neither the
Executive nor MCI has given notice to the other in writing at least 90 days
prior to such anniversary that the term of this Agreement shall not be extended
further. Reference herein to the term of this Agreement shall refer to both such
initial term and such extended terms.
2. EMPLOYMENT. The Executive is employed as the President of MCI. As
President, Executive shall render administrative and management services as are
customarily performed by persons situated in similar executive capacities,
including but not limited to such duties and
<PAGE> 2
responsibilities Executive performed prior to the Closing Date, establish
operating policies of MCI (subject to the reasonable review by MCI's Board of
Directors), and shall have such other powers and duties of an officer of MCI as
the Board of Directors may prescribe from time to time. The Executive shall
continue to devote his best efforts and substantially all his business time and
attention to the business and affairs of MCI. During the Executive's employment
with MCI, the Executive shall not engage in any activity which conflicts or
interferes with the performance of the duties hereunder or usurps the business
interest, existing or potential, of MCI. It is the intent of the Company that
management issues and operational issues arising in the ordinary course of MCI's
business be addressed, and solutions implemented, by MCI's officers; and that
policy issues and strategic planning be addressed by MCI's Board of Directors.
So long as executive is employed as President, he shall be permitted to
designate for nomination and election a majority of the Board of Directors of
MCI, which majority will be endorsed and approved by MCI and FirstFederal
Financial Services Corp.
3. COMPENSATION.
(a) SALARY. MCI agrees to pay the Executive during the term of this
Agreement an annual base salary of One Hundred Thousand Dollars ($100,000.00).
The base salary shall be paid in accordance with MCI's standard pay practices
and shall be subject to all local, state, and federal withholding requirements.
The base salary may be raised from time to time within the sound discretion of
the Board of Directors.
(b) DISCRETIONARY BONUSES. The Executive shall be entitled to
participate in an equitable manner with all other executive officers of MCI in
discretionary bonuses as authorized and declared by the Board of Directors to
its executives subject to such terms and conditions set forth in the Management
Incentive Compensation Plan.
(c) EXPENSES. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Company and MCI, PROVIDED
THAT the Executive properly accounts for such expenses in accordance with such
policies and procedures.
(d) NONCOMPETITION PAYMENT. In partial consideration for the issuance of
Shares, issuance of the FirstFederal Note, and payment of Cash pursuant to the
Merger Agreement, the Executive agrees to the noncompetition provisions set
forth in Section 7 hereof.
4. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. The
Executive shall be entitled to participate in all plans relating to stock
options, pension, thrift, profit-sharing, group life insurance, medical and
dental coverage, education, and other retirement or employee benefits or
combinations thereof ("Plans") that are now or hereafter maintained for the
benefit of MCI's
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executive employees or its employees generally, provided that the Executive
meets all eligibility requirements of such Plans.
(b) FRINGE BENEFITS. The Executive shall be eligible to participate in,
and receive benefits under, any other fringe benefit plans which are or may
become applicable to MCI's executive officers.
5. VACATIONS; LEAVE. The Executive shall be entitled to annual paid
vacation in accordance with the policies established by MCI's Board of Directors
for executive employees and to voluntary leave of absence, with or without pay,
from time to time at such times and upon such conditions as the Board of
Directors of MCI may determine in its discretion.
6. TERMINATION OF EMPLOYMENT.
(a) INVOLUNTARY TERMINATION. The Board of Directors may terminate the
Executive's employment at any time, but, except in the case of Termination for
Cause, termination of employment shall not prejudice the Executive's right to
compensation or other benefits under this Agreement. In the event of Involuntary
Termination, MCI shall pay to the Executive during the remaining term of this
Agreement, his salary at the rate in effect immediately prior to the Date of
Termination, payable in such manner and at such times as such salary would have
been payable to the Executive under Section 1 if the Executive had continued to
be employed by MCI.
(b) TERMINATION FOR CAUSE. In the event of Termination for Cause, MCI
shall pay the Executive his salary through the Date of Termination, and MCI
shall have no further obligation to the Executive under this Agreement.
(c) DEATH; DISABILITY. In the event of the death of the Executive while
employed under this Agreement and prior to any termination of employment, the
Executive's estate, or such person as the Executive may have previously
designated in writing, shall be entitled to receive from MCI the salary of the
Executive through the last day of the calendar month in which the Executive
died. If the Executive becomes disabled as defined in MCI's then current
disability plan or if the Executive is otherwise unable to serve as President,
the Executive shall be entitled to receive group and other disability income
benefits of the type then provided by MCI for executive officers.
7. NONCOMPETITION.
(a) Executive covenants and agrees that;
(i) Executive shall not, in the United States of America,
directly or indirectly, for a period commencing on the closing Date and
terminating on the date three years if Executive is Terminated for Cause
or voluntarily terminates his employment or two years if Executive is
involuntarily terminated following the Date of Termination (the
"Restricted Period"), for whatever reason, directly or indirectly,
whether as shareholder, partner, joint
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venturer, or agent of any person, firm or corporation or other entity or
otherwise, engage in any or all of the following activities:
(a) Enter into or engage in any business which directly or
indirectly competes with the business of MCI;
(b) Interfere or attempt to interfere with the business,
goodwill, trade, customers or employees of MCI or with any one dealing
with MCI in the operation of MCI's business;
(c) Solicit dealers or lending institutions' business,
patronage, or perform any services for, any business which directly or
indirectly competes with the business carried on by MCI as it is
conducted on the Closing Date;
(d) Promote or assist, financially or otherwise, any person,
firm, association or corporation engaged in any business which directly
or indirectly competes with the business carried on by MCI.
(ii) During the Restricted Period, the Executive shall not,
directly or indirectly, knowingly solicit or encourage to leave the
employment of Company or MCI, any employee of MCI or hire any employee
who has left the employment of MCI after the date of this Agreement
within one year of the termination of such employee's employment with
MCI or such shorter period as shall be agreed by MCI in writing.
(b) If the Executive violates this restrictive covenant and MCI brings
legal action for injunctive or other relief, MCI shall not as a result of the
time involved in obtaining the relief be deprived of the benefit of the full
period of the restrictive covenant. Accordingly, the restrictive covenant shall
be deemed to have the duration specified herein, computed from the date the
relief is granted, but reduced by the time between the period when the
restriction began to run and the date of the first violation of the covenant by
Executive.
If any court shall determine that the duration or geographical limit of
any restriction contained in this paragraph is unenforceable, it is the
intention of the parties that the restrictive covenant set forth herein shall
not thereby be permitted to be terminated but shall be deemed amended to the
extent required to render it valid and enforceable. Such amendment shall apply
only with respect to the operation of this paragraph and the jurisdiction of the
court that has made the adjudication.
(c) If any court determines that any provision of this Section, or any
part thereof, is invalid or unenforceable, the remainder of the provisions of
this Section shall not thereby be affected and shall be given full effect,
without regard to the invalid portions.
(d) If any court determines that any of the provisions of this Section,
or any part thereof, is unenforceable because of the duration of such provision
or the area covered thereby,
-4-
<PAGE> 5
such court shall have the power to reduce the duration or area of such
provisions and, in its reduced form, such provision shall then be enforceable
and shall be enforced.
8. DISCLOSURE OF INFORMATION. The Executive acknowledges that in and as
a result of his employment hereunder, he will be making use of, acquiring and/or
adding to confidential information of a special and unique nature and value
relating to such matters as MCI's and its affiliated companies' trade secrets,
Systems, procedures, manuals, confidential reports, and lists of customers. As a
material inducement to MCI to enter into this Agreement and for MCI to pay
Executive compensation stated in Section 3, as well as any additional benefits
provided for herein, Executive covenants and agrees that he shall not at any
time during or following the term of his employment, directly or indirectly
divulge or disclose for any purpose whatsoever any confidential information that
has been obtained by or disclosed to him as the result of employment by MCI
heretofore or hereafter, except that there shall be no breach of this Section so
long as Executive is acting in good faith and there is no material harm to MCI;
provided, however, that this duty of confidentiality shall not apply to
information which is on the date hereof generally known to the public or which
is subsequently made public by an individual authorized to do so.
9. SURRENDER OF BOOKS AND RECORDS. Executive acknowledges that all
files, books, records, literature, products, and other materials owned by MCI or
its affiliates or used by it in connection with the conduct of its business
shall at all times remain the property of MCI and that upon termination of the
employment hereunder, irrespective of the time, manner, or cause of said
termination, Executive will surrender to MCI all such files, books, records,
literature, products, and other materials, other than such personal effects not
related to the operation of the business.
10. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party.
(b) This Agreement and all rights of the Executive hereunder shall inure
to the benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
11. REMEDIES. It is recognized by Executive that a special and
confidential relationship exists between MCI and Executive because of his
knowledge, expertise and judgment and the dependence of MCI upon his knowledge,
expertise and judgment. Executive agrees that the remedy at law for any breach
of threatened breach of the covenants set forth in paragraphs 7, 8 and 9 hereof
will be inadequate and that any breach or attempted breach of such covenants
would cause such immediate and permanent damage as would be irreparable and the
exact amount of which would be impossible to ascertain. Executive further agrees
that in the event of any such breach or threatened breach of such covenants by
Executive, in addition to any and all other legal and equitable remedies
available, MCI may have any of such actions enjoined by
-5-
<PAGE> 6
any court authorized by law to take such action. Executive acknowledges and
agrees that the limitations contained in paragraphs 7, 8 and 9 hereof are
reasonable and properly required for the adequate protection of MCI.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to MCI at its home office, to
the attention of the Board of Directors with a copy to the secretary of MCI, or,
if to the Executive, to such home or other address as the Executive has most
recently provided, in writing to MCI.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. HEADINGS. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity and unenforceability of any provisions shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by and is to be
construed and enforced in accordance with the laws of the State of Ohio.
17. ARBITRATION. Any dispute or controversy arising hereunder or in
connection with this Agreement shall be finally and conclusively determined by
the decision of a board of arbitration consisting of three members (hereinafter
sometimes called the "Board of Arbitration") collected as hereinafter provided.
Both MCI and Executive shall select one member and the third member shall be
selected by mutual agreement of the other members, or if the other members fail
to reach an agreement on a third member within 20 days after their selection,
the third member shall thereafter be selected by the American Arbitration
Association upon application made to it for such purpose by MCI. The Board of
Arbitration shall meet in Wooster, Ohio, or in such other place as the majority
of the members of the Board of Arbitration determines more appropriate and shall
reach and render a decision in writing (concurred in by a majority by the
members of the Board of Arbitration) with respect to the resolution of the
dispute or controversy. In connection with rendering its decision, the Board of
Arbitration shall adopt and follow such rules and procedures, except with regard
to discovery matters, as a majority of the members of the Board of Arbitration
deem necessary or appropriate. Arbitration discovery shall be that discovery
allowed by Ohio Rules of Civil Procedure (Rule 5) as amended and modified by the
parties herein permitting discovery by deposition, interrogatories, requests for
admission, and production of documents, which Rules are incorporated by
reference herein, but shall be modified in their application as follows: (i)
depositions shall be limited to: the adversary (or in case of a corporation or
other entity to two agents thereof who may be required to be identified as
-6-
<PAGE> 7
competent for the discovery purpose); other third party witnesses whose
discovery may lead to relevant evidence for the preparation of the arbitration;
other third party witnesses whose testimony reasonably needs to be perpetuated,
including witnesses who by affidavit, state that they cannot be available for
the hearing. Depositions of third party witnesses shall be limited to three;
(ii) request for production of documents shall be limited to one set of relevant
and reasonable requests and to such supplemental requests as may be reasonably
required from information produced; (iii) each side shall be permitted one set
of interrogatories and request for admissions, each consisting of no more than
thirty (30) items including sub-parts; (iv) the limitations contained herein on
the number of depositions, requests for production of documents,
interrogatories and requests for admissions may be modified by a majority of the
members of the Board of Arbitration upon motion of a party; (v) all discovery
disputes shall be resolved by the Arbitrator whose decision shall be final,
except as below provided, in any post-award proceeding under O.R.C. Chapter
2711, the court may consider as an additional ground for vacating or modifying
the award an Arbitration Discovery decision involving a gross abuse of
discretion, the arbitrator and/or the court shall also be empowered to impose
costs, expenses (excluding attorney's fees) and sanctions as provided in the
Rules of Civil Procedure against any party for failure to comply with the
Arbitration Discovery, and to base such imposition on the same criteria used by
the courts in similar circumstances. To the extent practical, decisions of the
Board of Arbitration shall be rendered no more than 30 calendar days following
commencement of proceedings with respect thereto. The Board of Arbitration shall
cause its written decision made by the Board of Arbitration (either prior to or
after the expiration of such 30 calendar day period) shall be final, binding and
conclusive on MCI and Executive and entitled to be enforced to the fullest
extent permitted by law and entered in any court of competent jurisdiction. The
party against whom any decision is rendered by the Board of Arbitration shall
pay (i) its own expenses in relation to any arbitration, including but not
limited to such party's attorneys' fees, (ii) the expenses and fees of the Board
of Arbitration, and (iii) all expenses, including but not limited to attorneys'
fees, of the prevailing party to any such arbitration. Notwithstanding anything
in this Agreement to the contrary, nothing in this Agreement shall restrict or
prohibit any party to any arbitration under this Section from obtaining
injunctive relief in connection with any claim hereunder.
18. DEFINITIONS.
(a) The term "Date of Termination" means the earlier of (1) the date
upon which MCI gives notice to the Executive of the termination of his
employment with MCI or (2) the date upon which the Executive ceases to serve as
an employee of MCI.
(b) The term "Involuntary Termination" means the termination of the
employment of Executive without his express written consent, and shall include a
material diminution of or interference with the Executive's duties,
responsibilities and benefits as President of MCI, including (without
limitation) any of the following actions unless consented to in writing by the
Executive; (1) a change in the principal workplace of the Executive to a
location outside of a 60 mile radius from MCI's headquarters office as of the
date hereof; (2) a material demotion of the Executive; (3) a material reduction
in the number or seniority of other MCI personnel reporting
-7-
<PAGE> 8
to the Executive or a material reduction in the frequency with which, or in the
nature of the matters with respect to which, such personnel are to report to the
Executive, other than as part of an MCI-wide reduction in staff; (4) a material
adverse change in the Executive's salary, perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of MCI or the
Company; and (5) a material permanent increase in the required hours of work or
the workload of the Executive. The term "Involuntary Termination" does not
include Termination for Cause or termination of employment due to retirement,
death, disability or suspension.
(c) The terms "Termination for Cause" and "Terminated for Cause" mean
termination of the employment of the Executive because of the Executive's
personal dishonesty, willful misconduct, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses), incompetence, or
material breach of any provision of this Agreement. No act, or failure to act,
on the Executive's part shall be considered "willful" unless the Executive has
acted (or failed to act) with an absence of good faith and without reasonable
belief that the Executive's action or failure to act was in the best interest of
MCI.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
MOBILE CONSULTANTS, INC.
By /s/ Ronald A. James, Jr.
------------------------------
/s/ Ronald A. James, Jr.
---------------------------------
Ronald A. James, Jr.
-8-
<PAGE> 1
Exhibit 13
Selected Consolidated
FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
Financial Condition data:
- ------------------------- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share)
Total assets $1,080,383 947,270 835,667 682,639 570,949
Loans receivable, net 756,768 581,060 478,576 381,241 313,324
Mortgage-backed securities 172,522 261,121 281,952 231,828 194,211
Interest-bearing deposits in other
financial institutions 9,000 8,862 1,097 3,935 3,072
Investment securities 54,010 45,748 32,726 27,250 25,210
Deposits 671,918 574,041 502,527 453,821 429,421
Borrowings, including advances 312,413 286,726 258,171 168,379 89,802
Shareholders'equity $ 85,287 76,533 69,246 53,673 45,780
Operations data:
- ------------------------- ----------------------------------------------------------------------------
Interest and dividend income $ 73,559 64,922 51,987 45,510 40,061
Interest expense 48,048 41,046 29,260 25,319 24,987
Provision for losses on loans 360 -- 15 1,025 1,884
Net interest income after provision
for losses on loans 25,151 23,876 22,712 19,166 13,190
Gain on sale of loans 3,836 1,451 890 3,908 2,488
Net gains on sales of investments
and mortgage-backed securities 397 384 168 -- --
Manufactured housing brokerage fees, net 6,726 -- -- -- --
Other operating income 6,970 2,332 1,857 2,093 1,936
SAIF Assessment 3,341 -- -- -- --
Total operating expenses 24,005 13,651 12,116 10,374 8,561
Earnings before income taxes 15,734 14,392 13,511 14,793 9,053
Income tax provision 5,884 4,946 4,490 5,054 2,898
Net earnings 9,850 9,446 9,021 9,739 6,155
Net earnings applicable to common stock 8,154 7,660 7,657 8,733 6,010
Net earnings per share - primary (1) 2.28 2.31 2.32 2.66 1.85
- fully diluted (1) 1.78 1.78 1.79 2.09 1.70
Dividends declared and paid per common share 0.47 0.43 0.42 0.29 0.20
Other data:
- ------------------------- ----------------------------------------------------------------------------
Interest rate spread 2.41% 2.49% 2.93% 3.19% 3.09%
Net interest margin 2.60 2.78 3.17 3.40 3.22
Expense ratio 2.67 1.54 1.63 1.67 1.75
Efficiency ratio 61.03 50.61 47.85 45.49 49.61
Overhead ratio 33.64 38.10 43.59 39.83 43.13
Interest-earning assets to interest-bearing liabilities 103.96 106.19 105.98 104.93 103.84
Non-performing assets to total assets 0.37 0.20 0.43 0.58 0.88
Shareholders' equity to total assets 7.89 8.08 8.29 7.86 8.02
Return on average assets 0.95 1.07 1.21 1.57 1.26
Return on average shareholders' equity 12.20 12.90 14.17 19.62 19.09
Dividend payout ratio
(common dividends divided by net earnings) 17.30 14.85 13.73 9.83 10.87
Regulatory core capital (2) $ 68,236 61,794 62,005 48,389 39,343
Number of branch offices 20 18 17 15 14
<FN>
(1) All per common share amounts have been restated to reflect stock dividends
and stock splits.
(2) Determined pursuant to the then applicable regulatory requirements.
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
FirstFederal Financial Services Corp (the "Corporation"), an Ohio
corporation, is a savings and loan holding company whose subsidiaries are First
Federal Savings and Loan Association of Wooster ("First Federal" or the
"Association") and Mobile Consultants, Inc. (MCi"). The business of the
Association is to provide consumer, retail mortgage and commercial lending to
the markets it serves, to attract checking and savings deposits from the general
public, and to borrow in order to fund its lending activities. The Association
conducts business through 20 retail banking branches located within its North
Central Ohio market and three loan production offices located in Canton, Stow,
and Newark Ohio. MCi, a manufactured housing finance company that brokers the
contracts it originates to financial institutions, was founded in Alliance, Ohio
in 1974, and was acquired by the Corporation for a combination of cash, notes
and stock in April 1996. MCi conducts business in 27 states through
relationships established with over 3,500 retailers of manufactured homes.
The Corporation is significantly affected by prevailing economic conditions
as well as federal regulations concerning monetary and fiscal policies as they
pertain to financial institutions. Deposit balances are influenced by a number
of factors including interest rates paid on numerous competing personal
investments. Lending activities are influenced by the demand for housing,
competition from other financial institutions and mortgage brokers, as well as
higher interest rates which may decrease the overall demand for borrowing. The
Corporation's net earnings are also significantly impacted by these same
economic conditions that affect the market area, particularly changes in market
interest rates.
The primary reason for the lower profitability of the Corporation for the
year ended December 31, 1996 was a significant increase in non-interest expense
as a result of the signing into law of the Deposit Insurance Funds Act of 1996
("DIFA"). which resulted in a one time charge to non-interest expense of $3.3
million in the quarter ended September 30, 1996. On September 30, 1996, the
President signed into law DIFA to recapitalize the Savings Association Insurance
Fund ( "SAIF") administered by the Federal Deposit Insurance Corporation
("FDIC") and to provide for repayment of the FICO (Financial Institution
Collateral Obligation bonds issued by the United States Treasury Department. The
FDIC levied a one-time special assessment on SAIF deposits equal to 65.7 cents
per $100 of the SAIF-assessable deposit base as of March 31, 1995. During the
years 1997, 1998 and 1999, the Bank Insurance Fund (`BIF") will pay $322 million
of FICO debt service, and SAIF will pay $458 million.
During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits. Individual
institution's assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the assessments as
necessary to maintain the funds at their target capital ratios provided by law.
After 1999, BIF and SAIF will share the FICO costs equally. Under current
estimates, BIF and SAIF assessment bases would each be assessed at the rate of
approximately 2.43 cents per $100 of deposits. The FICO bonds will mature in
2018-2019, ending the interest payment obligation.
The law also provides that BIF and SAIF are to merge to form the Deposit
Insurance Fund ("DIF") at the beginning of 1999, provided that there are no SAIF
institutions in existence at that time. Merger of the Funds will require state
laws to be amended in those states authorizing savings associations to eliminate
that authorization (state chartered savings banks will not be affected). This
provision reflects Congress's apparent intent to merge thrift and commercial
bank charters by January 1999; however, no law has yet been enacted to achieve
that purpose. The Act also provides regulatory relief to the financial services
industry relative to environmental risks, frequency of examinations, and the
simplification of forms and disclosures.
Based on current deposit levels, management expects that the decrease in
the FDIC assessment rate will favorably impact pretax results of operations in
an amount estimated at $1.1 million for 1997.
RESULTS OF OPERATIONS
- ---------------------
Net Earnings. The Corporation had net earnings of $9.8 million for the year
ended December 31, 1996, compared to $9.4 million and $9.0 million, for the
years ended December 31, 1995 and 1994, respectively. Net earnings applicable to
common shareholders after the payment of the preferred dividends were $8.1
million, $7.7 million, and $7.7 million for the years December 31, 1996, 1995,
and 1994, respectively. Net earnings in 1996 increased primarily due to
increased net interest income, gains on sales of loans, manufactured housing
brokerage fees, and other operating income partially offset by increased
operating expenses. Net earnings in 1995 increased primarily due to increased
net interest income, gains on sales of loans, and other operating income
partially offset by increased operating expenses. The Corporation's return on
average assets was 0.95% for 1996 compared to 1.07%, and 1.21% for 1995 and
1994, respectively. At the same time the Corporation's return on average equity
was 12.20% for 1996 compared to 12.90% and 14.17% for 1995 and 1994,
respectively.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Corporation's net earnings, like that of many financial institutions,
are dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, and its
interest expense on interest-bearing liabilities, such as deposits and
borrowings. As a result, in times of rising interest rates, decreases in the
difference between the yields received on loans and other investments and the
rates paid on deposits and borrowings usually occur, causing reductions in
earnings. However, interest received by the Corporation on its short-term
investments and its adjustable-rate loans also increase as a result of upward
trends in short-term interest rates, which enable the Corporation to partially
compensate for increasing deposit and borrowing costs.
Net interest Income. Net interest income was $25.5 million in 1996, $23.9
million in 1995 and $22.7 million in 1994, representing increases of $1.6
million, or 6.7% in 1996, $1.2 million, or 5.3% in 1995 and $2.4 million or
12.1% in 1994. Net interest income increased in 1996 primarily because of a
14.3% increase in total-interest earning assets, partially offset by a decrease
of 7 basis points in the yield on these earning assets, and a 16.8% increase in
the volume and a 1 basis point increase in the average rate paid on deposits and
borrowings. The increase in interest-earning assets was partially funded by the
acquisition of $26.6 million in deposits from a commercial bank in Mount Vernon,
Ohio. The deposits were merged into an existing branch of the Association. Net
interest income increased in 1995 primarily because of a 19.9% increase in
total-interest earning assets and an increase of 31 basis points in the yield on
these earning assets offset partially by a 19.6% increase in the volume and a 75
basis point increase in the average rate paid on deposits and borrowings. Net
interest income increased in 1994 primarily due to the increased volume of
interest-earning assets acquired with the funds obtained from two branch
purchases (one in Ontario, Ohio on November 12, 1994 and one in Mansfield, Ohio
on May 7, 1994) and FHLB advances and other borrowings partially offset by an
increase in the volume of deposits and borrowings.
The following table sets forth information concerning the Corporation's
interest-earning assets, interest-bearing liabilities, net interest income,
interest rate spreads, and net interest margin on average interest-earning
assets and interest expense on average interest-bearing liabilities for the
periods indicated (including amortization of fees which are considered
adjustments to yields). Average balances are based on daily average balances.
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
(Dollars in Thousands) Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance (1) Paid Rate Balance (1) Paid Rate Balance (1) Paid Rate
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 718,802 $56,274 7.83% $527,885 $42,841 8.12% $413,639 $33,750 8.16%
Mortgage-backed securities 207,842 13,371 6.43% 272,925 17,934 6.57% 256,078 15,472 6.04%
Investment securities 38,985 2,852 7.32% 43,839 3,231 7.37% 36,491 2,204 6.04%
Other interest-earning assets 15,255 1,062 6.96% 13,428 916 6.82% 9,693 561 5.79%
---------------------------------------------------------------------------------------------
Total interest-earning assets 980,884 73,559 7.50% 858,077 64,922 7.57% 715,901 51,987 7.26%
Non interest-earning assets 54,405 -- -- 27,650 -- -- 25,821 -- --
---------------------------------------------------------------------------------------------
Total assets 1,035,289 885,727 741,722
---------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Non-interest checking 20,090 -- -- 8,804 -- -- 6,679 -- --
Interest-bearing checking 57,547 1,192 2.07% 49,746 942 1.89% 44,293 857 1.93%
Passbook savings 132,874 4,069 3.06% 127,789 3,863 3.02% 151,214 4,578 3.03%
Money market deposits 14,034 483 3.44% 12,537 424 3.38% 15,507 391 2.52%
Certificates of deposit 400,972 23,399 5.84% 325,391 18,889 5.81% 267,227 12,845 4.81%
---------------------------------------------------------------------------------------------
Total deposits 625,517 29,143 4.66% 524,267 24,118 4.60% 484,920 18,671 3.85%
Advances and other borrowings 317,999 18,905 5.94% 283,828 16,928 5.96% 190,612 10,589 5.56%
---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 943,516 48,048 5.09% 808,095 41,046 5.08% 675,532 29,260 4.33%
Non-interest-bearing liabilities 11,010 4,421 2,605
---------------------------------------------------------------------------------------------
Total liabilities 954,526 812,516 678,137
Total shareholders' equity 80,763 73,211 63,585
---------------------------------------------------------------------------------------------
Total 1,035,289 885,727 741,722
---------------------------------------------------------------------------------------------
Net interest income 25,511 23,876 22,727
Interest rate spread 2.41% 2.49% 2.93%
Net interest margin (2) 2.60% 2.78% 3.17%
Average interest-earnings
assets to average interest-
bearing liabilities 103.96% 106.19% 105.98%
<FN>
(1) Average balances include non-accrual loans and interest income includes
loan fee amortization of $188,000, $301,000 and $498,000 for the years
ended December 31, 1996, 1995 and 1994, respectively
(2) Net interest income dividend by the average balance of interest-earning
assets.
</TABLE>
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table sets forth the yields earned on interest-earning assets, the
interest rates paid on interest-bearing liabilities, and the interest rate
spread between the weighted average yield earned and weighted average rates paid
at the dates indicated.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Weighted average yield on:
------------------------------------
Loans receivable 7.98% 8.04% 8.13%
Mortgage-backed securities 6.31 6.59 6.44
Investment securities 5.90 7.20 6.53
Other interest-earning assets 7.00 7.15 7.57
------------------------------------
Total interest-earning assets 7.55 7.56 7.46
Weighted average rate paid on:
Deposits 4.59 4.76 4.07
Borrowings 6.17 5.96 5.72
------------------------------------
Total interest-bearing liabilities 5.08 5.17 4.63
------------------------------------
Spread 2.47 2.39 2.83
====================================
</TABLE>
Total interest and dividend income increased by $8.6 million, or 13.3%, to
$73.6 million during 1996 as compared to $64.9 million for 1995. Total interest
and dividend income also increased for 1995 versus 1994 by $12.9 million, or
24.9%, to $64.9 million during 1995 as compared to $52.0 million for 1994. Both
1996 and 1995 saw increases in interest and dividend income due to increases in
the average balances of interest-bearing assets. A significant change in average
balances of interest-bearing assets for 1996 was the shift in assets from
mortgage-backed securities to loans receivable as the Corporation was successful
in originating record volumes of mortgage, consumer, and commercial loans during
1996. Rate changes resulted in a decrease in total interest and dividend income
for 1996 versus 1995, while they contributed to an increase for 1995 versus
1994. Both periods interest rate changes are reflective of economic cycles that
saw shorter-term deposits reprice more quickly than the longer-term loans
receivable on the balance sheet.
Total interest expense for the year ended December 31, 1996 was $48.0
million as compared to $41.0 million for the year ended December 31, 1995, an
increase of $7.0 million, or 17.1%. Total interest expense for the year ended
December 31, 1994 was $29.3 million, representing a 39.9% increase for the year
ended December 31, 1995. The primary reason for the increase, for both periods,
was attributable to a higher volume of liabilities both deposits and advances
and other borrowings. A less significant impact for 1996 was higher cost of
deposits and borrowings. Higher interest rates on cost of deposits and
borrowings did however have a significant impact on 1995 interest expense versus
1994, as the average rate paid on deposits and borrowings increased by 75 basis
points for the year to 5.08%, as compared to 4.33% for the year ended December
31, 1994. This increase was due primarily to rising interest rates in the
economy throughout the last half of 1994 and the first half of 1995.
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table sets forth the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Corporation's interest income and interest expense
during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in rate (i.e., changes in rate multiplied by prior volume) and (ii)
changes in volume (i.e., changes in volume multiplied by prior rate). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 vs 1995 1995 vs 1994
Increase (Decrease) Due To: Increase (Decrease) Due To:
---------------------------------- -------------------------------
(Dollars in Thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $ 15,462 (2,029) 13,433 9,289 (198) $ 9,091
Mortgage-backed securities (4,231) (332) (4,563) 1,062 1,400 2,462
Investment & other interest-earning assets (230) (3) (233) 734 648 1,382
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 11,001 (2,364) 8,637 11,085 1,850 12,935
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense attributable to:
Deposits 4,688 337 5,025 1,662 3,785 5,447
FHLB advances and other borrowings 2,035 (58) 1,977 5,380 959 6,339
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,723 279 7,002 7,042 4,744 11,786
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 1,635 $ 1,149
===========================================================================================================================
</TABLE>
Provision for Losses on Loans. The Corporation maintains an allowance for
losses on loans which covers specifically identified loans as well as estimated
losses inherent in the loan portfolio. The provision represents an attempt by
management to set aside a level of reserves that is adequate to cover potential
losses. Future additions to this allowance will be dependent on a number of
factors, including the performance of the Corporation's loan portfolio, the
economy, changes in interest rates and the effect of such changes on real estate
values, the view of regulatory authorities toward adequate reserve levels and
inflation. The Corporation provided $360 thousand for loan losses in 1996
compared to $0 and $15 thousand, for 1995 and 1994, respectively. The provision
for losses on loans increased for 1996 as the Association increased its
originations of commercial and consumer loans, which historically incur higher
loan losses. The Association's ratio of non-performing assets to total assets
was .37% as of December 31, 1996, as compared to .20% and .43%, at December 31,
1995 and 1994, respectively. The minor increase for 1996 was due primarily to an
increase in loans delinquent greater than 90 days.
Non-Interest Income. Non-interest income increased significantly for 1996
to $17.9 million from $4.2 million for the year ended December 31, 1995. The
increase in 1996 was due primarily to the increased gains on sales of loans,
higher retail banking fees, and the addition of $6.7 million in manufactured
housing brokerage fees during 1996 as a result of the acquisition of MCi. Net
gains on sales of loans were $3.8 million, $1.5 million and $0.9 million for the
years ended December 31, 1996, 1995 and 1994 respectively. The increase in gains
for 1996 was primarily due to the increased volume of loans sold during the year
($272.8 million versus $88.5 million) as the Corporation originated a higher
percentage of fixed rate loans which are generally sold. The other component to
the increase in gains on the sale of loans was the sale of $48.9 million of
manufactured housing loans in October of 1996 that resulted in a $1.5 million
gain. This sale was done through an asset-backed securitization, which is
expected to be a continuing corporate effort and will become a significant
portion of future earnings. The increase in gains for 1995 versus 1994 was also
due to a high volume of fixed rate mortgage loan sales. Other operating income
was $7.0 million, $2.3 million and $1.9 million for the years ended December 31,
1996, 1995 and 1994, respectively. The increase in other operating income for
1996 was primarily due to the $3.2 million of servicing income that MCi
recognized from servicing manufactured housing loans for banks other than the
Association. The remaining increase was due to retail deposit fees from a new
checking account program the Association initiated during the prior year to
increase the percentage of deposits that are considered core deposits. The 1995
increase versus 1994 was due also to retail deposit fees from the new checking
account program.
Operating Expenses. Total operating expense has increased 100.32% for 1996
to $27.3 million from $13.7 million for 1995. The increase is attributable to
three primary components. The first component, as discussed above, is the
significant increase in
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
Federal insurance premium as a result of the signing into law of DIFA, which
resulted in a one time charge of $3.3 million. The second component is the
addition of MCi operating expenses of $6.5 million for 1996. The third component
is the general increase in overhead for the Corporation as it develops the
necessary staff, technology, and back-office capabilities necessary to transform
into a full service community bank. Excluding the effect of the first two
components, total operating expense increased $3.8 million or 27.7% over the
$13.7 million for 1995. This increase is spread across all categories of
operating expense as the Corporation acquired a new branch, added a seven-person
commercial lending unit, and converted from an in-house system to a third-party
data servicer to enhance it's technological capabilities. This higher level of
overhead, excluding the impact of components one and two above, resulted in an
overhead ratio of 53.5% as compared to the 50.6% ratio for 1995. This higher
overhead ratio is expected to abate as higher interest income and fee income is
realized from the new lines of business.
The 12.7% increase in actual operating expenses for 1995 versus 1994 was
due primarily to increased compensation and benefits, premises and equipment,
professional fees and other operating expense. The increase in compensation and
benefits was due primarily to the addition of employees for new branches in
Wooster and Orrville, Ohio during 1995. Also, several people were added to back
office departments to handle increased checking account and lending volumes.
Premises and equipment expense increased primarily due to the new branch office
opened in Wooster. Professional fees increased primarily due to increased OTS
assessments and other professional fees at the Corporation. Other expenses
increased primarily due to increases in loan expense from higher loan volumes
and marketing costs associated with a new high performance checking account
campaign the Association started in June 1996.
ASSET LIABILITY MANAGEMENT
- --------------------------
The Corporation, like other financial institutions, is subject to interest
rate risk to the extent its interest-earning assets reprice or mature
differently than its interest-bearing liabilities. The primary objective of
interest rate risk management is to maintain a balance between the stability of
net interest income and the risks of changing market interest rates. `The
Association's asset/liability committee monitors and manages interest rate risk
on an ongoing basis through the use of a number of strategies which include
attempting to originate adjustable-rate mortgage loans where possible,
increasing the percentage of shorter term consumer loans, maintaining a large
base of core deposits, emphasizing certificate of deposit accounts with a
maturity of two years or greater and utilizing longer term FHLB advances.
One measure of determining the Corporation's vulnerability to changing
interest rates is the percentage of loans and mortgage-backed securities that
are adjustable or short-term in nature, as such assets adjust more quickly to
changes in interest rates. The percentage of the Corporation's loans and
mortgage-backed securities that are adjustable-rate or short-term decreased from
47.3% at December 31, 1995 to 42.2% at December 31, 1996. This decrease was due
primarily to the increased origination of fixed rate manufactured home loans
during the last half of 1996. These loans are securitized and sold by the
Corporation, thus mitigating the interest rate risk. When originations of
fixed-rate products increase, as it did this year, the Corporation will
generally sell the longer maturity loans when market conditions permit.
The table below shows the breakdown of the Corporation's portfolio of gross
loans receivable and mortgage-backed securities by fixed and adjustable rate.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Adjustable-rate loans and
mortgage-backed securities $ 332,175 34.23% $ 369,411 41.51% $ 322,049 40.44%
Short-term consumer loans 77,127 7.95 52,003 5.84 51,694 6.49
- ------------------------------------------------------------------------------------------------------------------
409,302 42.18 421,414 47.35 373,743 46.93
Fixed-rate loans and
mortgage-backed securities 561,008 57.82 468,501 52.65 422,691 53.07
- ------------------------------------------------------------------------------------------------------------------
Gross loans receivable and
mortgage-backed securities $ 970,310 100.00% $ 889,915 100.00% $ 796,434 100.00%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
A second measure of determining the vulnerability to changing interest
rates is the interest-rate sensitivity gap, or the difference between assets and
liabilities scheduled to mature or reprice within a specific period. At December
31, 1996, the Corporation had $17.2 million more in assets maturing or repricing
in the next year than liabilities. The one year interest rate sensitivity gap as
a percentage of total assets was a positive 1.6% at December 31, 1996 as
compared to a positive 2.8% at December 31, 1995. The low level of interest rate
risk in 1996 as measured under a gap analysis, reflects the increased emphasis
by the Corporation to maintain shorter-term consumer loans and adjustable-rate
mortgage loans in the portfolio while at the same time selling the longer term
fixed rate loans. The Corporation has also strategically extended the maturities
of its borrowings as long term rates have declined over the last six months. The
Corporation strives to maintain a position of neutrality between the maturities
of its interest-earning assets and interest-bearing liabilities. This results in
more stabilized net interest margins in periods of either rising or falling
interest rates.
The following table sets forth the repricing or maturing of the
Corporations interest-earning assets and interest-bearing liabilities at
December 31, 1996, based upon the use of a discounted cash flow analysis using
current rates for similar assets and prepayments factors from current market
dealers. The interest rate sensitivity gap is the amount by which assets
repricing or maturing within the respective periods exceeds liabilities
repricing or maturing within such periods.
<TABLE>
<CAPTION>
One Year Over 1 Over 3 Over 5
(Dollars in Thousands) or Less Through 3 Through 5 Years Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans receivable, net (1) $ 339,887 163,538 88,414 164,929 756,768
Mortgage-backed securities (1) 117,343 26,634 13,059 15,486 172,522
Investment securities (2) 53,702 1,040 20,758 4,995 80,495
------------------------------------------------------------------
Total 150,932 191,212 122,231 185,410 1,009,785
------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits 381,598 173,872 47,648 68,800 671,918
FHLB advances and other borrowings 112,182 135,044 47,454 17,733 312,413
------------------------------------------------------------------
Total 493,780 308,916 95,102 86,535 984,331
------------------------------------------------------------------
Interest rate sensitivity gap 17,152 (117,704) 27,129 98,877 25,454
------------------------------------------------------------------
Cumulative interest rate sensitivity gap 17,152 (100,552) 73,423 25,454 25,454
==================================================================
Interest rate sensitivity gap as a percent
of total assets 1.59% (10.89%) 2.51% 9.15% 2.36%
------------------------------------------------------------------
Cumulative interest rate sensitivity gap
as a percentage of total assets 1.59% (9.31%) (6.80%) 2.36% 2.36%
==================================================================
<FN>
(1) Includes scheduled loan amortizations as well as anticipated prepayments
based upon the interest rates of the assets and/or liabilities.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
</TABLE>
In evaluating the Corporation's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis in the foregoing table should be
considered. Although certain assets and liabilities may have similar maturities
or periods to repricing, they may react differently to changes in market
interest rates. For example, higher interest rates may cause savings customers
to incur early withdrawal penalties to access their funds, while mortgage
holders may curtail prepayments and thus lengthen the average maturity of
assets. Additionally, the interest rates on other types of assets and
liabilities may lag behind changes in market rates. Also, certain assets such as
adjustable-rate mortgages have features which limit changes in interest rates on
a short-term basis and over the life of the asset. Furthermore, in the event of
a change in interest rates, prepayment and early withdrawal levels would likely
deviate from those assumed in calculating the table. The Corporation considers
the anticipated effect of these factors in evaluating its exposure to interest
rate risk.
FINANCIAL CONDITION
- -------------------
Assets. Total consolidated assets of the Corporation were $1.08 billion, an
increase of $133.1 million, or 14.1%, from $947.3 million at December 31, 1995.
The growth in assets was due primarily to increases in loans receivable and
investment securities This 14.1% increase in assets was funded by increases in
retail deposit accounts, increased borrowings from both the FHLB and repurchase
agreements, and a reduction in mortgage-backed securities.
Loans receivable held for investment and for sale totaled $756.8 million at
December 31, 1996 compared to $581.1 million at December 31, 1995. This increase
of $175.7 million, or 30.2%, is attributable to loan originations of $576.5
million, offset, partially by loan sales of $272.8 million and additional loan
repayments. During 1996, the Corporation's originations were comprised of $51.6
million of adjustable-rate mortgage loans, $316.6 million of fixed-rate mortgage
loans, $179.0 million of consumer loans, and
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
$29.0 million of commercial and commercial real estate loans. The $179.0 million
in consumer loan originations, including $107.7 million manufactured housing
loans, was a record level for the Corporation. The Corporation will continue to
expand it consumer loan originations to put a larger portion of its assets in
higher yielding shorter-term loans, which includes increased lending for equity
lines of credit and manufactured housing. The increase in total originations was
due to a more favorable interest rate environment and the increased emphasis
placed on the Corporation's mortgage loan and consumer loan business, as well as
MCi's origination of manufactured home loans. Total loan originations increased
by $278.6 million, or 93.5%, for 1996 from $297.9 million during 1995.
The Corporation's asset quality provides a direct correlation between the
allowance for loan losses and the provisions that are established. The
Corporation's allowance remained consistent with the prior year as provisions
for loan losses of $0.4 million were made, and net charge-offs of $0.4 million
were realized. Allowances are established to provide for inherent loan portfolio
risks. Management evaluates the risks associated with the loan portfolio on an
ongoing basis by using historical loss information, current economic conditions
and other relevant factors. The Corporation's non-performing and restructured
assets as a percentage of total assets ratio at December 31, 1996, 1995, and
1994 were .37%, .20% and .43%, respectively. Management believes the allowance
is currently adequate to meet potential losses in the portfolio based upon its
evaluation of the risks in the loan portfolio.
The mortgage-backed securities portfolio of available for sale and held to
maturity securities serves as both a source of earnings and as an
asset/liability management tool. The Corporation's portfolio consists primarily
of a large percentage of federal government agency obligations and obligations
collateralized by US Government agencies, in the form of collateralized mortgage
obligations. The mortgage-backed securities portfolio declined by $88.6 million,
or 33.9%, to $172.5 million at December 31, 1996. The decline was due to the use
of proceeds from both principal payments and the sales of available for sale
mortgage-backed securities to fund additional mortgage and consumer loan
originations during the year.
Cash and cash equivalents and investment securities increased by $15.8
million during 1996. Cash is used primarily to fund loan originations and will
fluctuate depending upon the timing of originations, loan sales and various
deposit flows. The increase was primarily due to increased loan sales and
deposit inflows during the last half of 1996. FHLB stock increased $3.3 million
to $17.5 million at December 31, 1996. The increase was due to additional stock
purchase requirements in connection with the Corporation's additional FHLB
borrowings.
Deposit and Borrowing Activity. Total deposits were $671.9 million at
December 31, 1996, an increase of $97.9 million, or 17.1%, from $574.0 million
at December 31, 1995. Deposits increased because of the acquisition of a $26.6
million in deposits branch in Mount Vernon, Ohio (See Note 2 to the Consolidated
Financial Statements), increased use of brokered deposits, the compounding of
interest to savings deposit accounts and the increased emphasis on transaction
accounts during the year.
FHLB advances and other borrowings increased by $25.7 million, or 9.0% to
$312.4 million at December 31, 1996 from $286.7 million at December 31, 1995.
The increase was from the use of advances and other borrowings to fund increased
construction and adjustable-rate mortgage loan originations during the year
which are generally held in the Corporation's loan portfolio.
Liquidity and Capital Resources. The objectives of liquidity management are
to provide funds at an acceptable cost to meet loan demand, deposit withdrawals
and service other liabilities as they come due. The Corporation's liquidity is a
measure of its ability to fund loans and meet withdrawals of deposits and other
cash outflows. The primary sources of funds are principal and interest payments
on mortgage loans and mortgage-backed securities, sales of loans in the
secondary market, increased deposits and advances from the FHLB of Cincinnati.
The Association is dependent upon these sources of funds to originate new loans.
The Association is required by applicable federal regulations to maintain
in cash and liquid assets a monthly average of 5% of deposits and short-term
borrowings. The Association's liquidity ratio was 9.5% and 11.9% at December 31,
1996 and 1995, respectively. The slight decrease was due to the increase in
originations of loans, outpacing the growth in deposits for 1996.
The Corporation invests excess cash in federal funds and short term
investments and also receives interest on excess deposits held at the FHLB.
These excess funds are used for loan originations. At December 31, 1996, the
Association had commitments to fund loan originations of $15.9 million and
undisbursed loans-in-process of $36.7 million. In the opinion of management, the
Association has sufficient cash flow and borrowing capacity to meet this
commitment. The Association considers its liquidity and capital resources to be
adequate to meet its foreseeable short and long-term needs. The Association
expects to be able to fund or refinance, on a timely basis, its material
commitments and long-term liabilities.
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The consolidated Financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to 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 generally have a more significant impact on a financial
institution's performance than does the effect of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
RECENT ACCOUNTING ISSUES
- ------------------------
See Note 1 to the Consolidated Financial Statements for a discussion of
accounting and reporting developments affecting the Corporation.
<PAGE> 9
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
ASSETS
December 31,
1996 1995
---- ----
<S> <C> <C>
Cash on hand and in other financial institutions $ 26,012 18,621
Interest-bearing deposits in other financial institutions 9,000 8,862
----------- -----------
Total cash and cash equivalents 35,012 27,483
Investment securities
Available for sale (amortized cost of $47,865 and $41,720, respectively) 47,763 41,953
Held to maturity (fair value of $6,238 and $3,737, respectively) 6,247 3,795
Mortgage-backed securities
Available for sale (amortized cost of $95,445 and $174,981, respectively) 93,785 174,974
Held to maturity (fair value of $77,720 and $85,847, respectively) 78,737 86,147
Retained interest 6,491 --
Loans held for sale (fair value of $87,216 and $37,121, respectively) 87,071 36,664
Loans receivable, net of allowance for loan losses of $2,916
and $2,994, respectively 669,697 544,396
Accrued interest receivable 6,069 6,284
Stock in Federal Home Loan Bank of Cincinnati, at cost 17,485 14,172
Premises and equipment, net 10,386 7,442
Assets acquired in settlement of loans 241 99
Cost in excess of fair value of net assets acquired 10,572 2,575
Prepaid expenses and other assets 10,827 1,286
----------- -----------
Total assets $ 1,080,383 947,270
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 671,918 574,041
Advances from the Federal Home Loan Bank 286,796 262,072
Other borrowings 25,617 24,654
Advance payments by borrowers for taxes and insurance 1,937 3,714
Unremitted funds on loans sold 659 957
Accrued interest payable 3,034 2,771
Accrued expenses and other liabilities 5,135 2,528
----------- -----------
Total liabilities 995,096 870,737
Shareholders' equity
Serial preferred stock, no par value, authorized 1,500,000 shares;
issued and outstanding 498,287 and 538,847 Series A shares,
respectively, and 479,327 and 496,500 Series B shares, respectively 22,693 24,132
Common stock, $1.00 par value, authorized 20,000,000 shares; issued
4,053,194 and 3,745,808 shares, respectively; outstanding 3,624,710
and 3,271,927 shares respectively 4,053 3,405
Paid-in capital 29,568 16,310
Retained earnings 32,796 35,338
Treasury stock, at cost (428,484 and 473,881 shares, respectively) (2,677) (2,799)
Unrealized gain (loss) on securities available for sale (1,146) 147
----------- -----------
Total shareholders' equity 85,287 76,533
Commitments and contingencies
Total liabilities and shareholders' equity $ 1,080,383 947,270
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 10
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 56,274 42,841 33,750
Mortgage-backed securities 13,371 17,934 15,472
Investment securities 2,852 3,231 2,204
Dividends on stock in Federal Home Loan Bank of Cincinnati 1,062 916 561
---------- ---------- ----------
Total interest and dividend income 73,559 64,922 51,987
---------- ---------- ----------
Interest expense:
Deposits 29,143 24,118 18,671
Borrowings 18,905 16,928 10,589
---------- ---------- ----------
Total interest expense 48,048 41,046 29,260
---------- ---------- ----------
Net interest income 25,511 23,876 22,727
Provision for losses on loans 360 -- 15
---------- ---------- ----------
Net interest income after provision for losses on loans 25,151 23,876 22,712
---------- ---------- ----------
Non-interest income:
Net gains on sales of loans 3,836 1,451 890
Net gains on sales of investments and mortgage-backed securities 397 384 168
Manufactured housing brokerage fees, net 6,726 -- --
Other operating income 6,970 2,332 1,857
---------- ---------- ----------
Total non-interest income 17,929 4,167 2,915
---------- ---------- ----------
Operating expenses:
Compensation and related benefits 10,938 5,763 5,453
Premises and equipment 1,975 1,676 1,503
Federal insurance premium 4,643 1,173 1,074
State taxes 1,005 812 788
Professional and other fees 1,386 899 744
Other operating expenses 6,280 2,940 2,201
Amortization of cost in excess of fair value of net assets acquired 1,119 388 353
---------- ---------- ----------
Total operating expenses 27,346 13,651 12,116
---------- ---------- ----------
Earnings before income taxes 15,734 14,392 13,511
Income taxes:
Current 1,157 4,516 3,737
Deferred 4,727 430 753
---------- ---------- ----------
Total income taxes 5,884 4,946 4,490
---------- ---------- ----------
Net earnings $ 9,850 9,446 9,021
========== ========== ==========
Net earnings applicable to common stock $ 8,154 7,660 7,657
========== ========== ==========
Net earnings per common share:
Primary $ 2.28 2.31 2.32
Fully diluted $ 1.78 1.78 1.79
Weighted average number of shares outstanding
Primary 3,575,976 3,309,103 3,295,423
Fully diluted 5,520,857 5,319,980 5,034,237
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Preferred
Stock
-----
<S> <C>
Balances at December 31, 1993 $ 13,473
Net earnings -
Cash dividends
Common stock - $.42 per share -
Series A preferred stock - $1.75 per share -
Series B preferred stock - $.71 per share -
Proceeds from exercise of common stock options - 1,260 shares -
Proceeds from issuance of Series B preferred stock - 500,000 shares 11,650
Contribution of 3,791 common shares to the 401(k) plan -
Five-for-four stock split - 618,920 shares -
Unrealized loss on securities available for sale -
--------
Balances at December 31, 1994 25,123
Net earnings -
Cash dividends
Common stock - $.43 per share -
Series A preferred stock - $1.75 per share -
Series B preferred stock - $1.63 per share -
Proceeds from exercise of common stock options - 904 shares -
Contribution of 2,237 common shares to the 401(k) plan -
Conversion and redemption of 20,053 Series A preferred shares to
common shares (501)
Purchase of Series A preferred stock - 16,000 shares (402)
Purchase of Series B preferred stock - 3,500 shares (88)
Purchase of treasury stock - 48,189 shares -
10% common stock dividend -
Unrealized gain on securities available for sale -
--------
Balances at December 31, 1995 24,132
Net earnings -
Cash dividends
Common stock - $.47 per share -
Series A preferred stock - $1.75 per share -
Series B preferred stock - $1.63 per share -
Proceeds from exercise of common stock options - 10,818 shares -
Contribution of 4,233 common shares to the 401(k) plan -
Conversion and redemption of 15,260 Series A preferred shares to
common shares and 3,550 Series B preferred shares to common shares (459)
Purchase of Series A preferred stock - 25,300 shares (639)
Purchase of Series B preferred stock - 9,900 shares (341)
Purchase of treasury stock - 14,071 shares -
Issuance of 307,386 common shares in MCi acquisition -
10% common stock dividend -
Unrealized gain on securities available for sale -
--------
Balances at December 31, 1996 $ 22,693
========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Gain
Common Paid-In Retained Treasury (Loss) on Securities
Stock Capital Earnings Stock Available for Sale Total
----- ------- -------- ----- ------------------ -----
<S> <C> <C> <C> <C> <C>
2,477 11,759 28,130 (2,166) - 53,673
- - 9,021 - - 9,021
- - (1,239) - - (1,239)
- - (1,006) - - (1,006)
- - (357) - - (357)
- - - 7 - 7
- - - - - 11,650
- - 55 20 - 75
619 (619) - - -
- - - - (2,578) (2,578)
- ------- ------- ------- ------- ------- -------
3,096 11,140 34,604 (2,139) (2,578) 69,246
- - 9,446 - - 9,446
- - (1,403) - - (1,403)
- - (974) - - (974)
- - (809) - - (809)
- 2 - 5 - 7
- - 40 1 - 41
- 213 - 288 - -
- (296) - - - (698)
- (6) - - - (94)
- - - (954) - (954)
309 5,257 (5,566) - - -
- - - - 2,725 2,725
- ------- ------- ------- ------- ------- -------
3,405 16,310 35,338 (2,799) 147 76,533
- - 9,850 - - 9,850
- - (1,704) - - (1,704)
- - (870) - - (870)
- - (795) - - (795)
- 119 - 139 - 258
- - - 101 - 101
- 198 - 261 - -
- (879) - - - (1,518)
- (143) - - - (484)
- - - (379) - (379)
279 5,309 - - - 5,588
369 8,654 (9,023) - - -
- - - - (1,293) (1,293)
- ------- ------- ------- ------- ------- -------
4,053 29,568 32,796 (2,677) (1,146) 85,287
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 9,850 9,446 9,021
Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:
Provision for losses on loans 360 - 15
Deferred income taxes 4,727 430 753
Gain on sale of loans (3,836) (1,451) (890)
Net gain from sale of investments and mortgage-backed securities (397) (384) (168)
Depreciation and amortization 2,724 1,240 737
Proceeds from sale of loans held for sale 272,765 88,548 45,266
Disbursements for loans held for sale (323,172) (119,236) (31,817)
Net (increase) decrease in accrued interest 478 673 (824)
Increase (decrease) in other liabilities (2,446) 1,671 (2,194)
Net change in goodwill (9,116) - (1,500)
Net change in other assets (10,566) (1,693) (2,269)
--------- --------- ---------
Net cash provided (used) by operating activities (58,629) (20,756) 16,130
--------- --------- ---------
Cash flows from investing activities
Loans originated (253,068) (178,663) (189,413)
Principal repayments on loans receivable 131,216 108,298 79,650
Proceeds from:
Mortage-backed securities repayments and sales
Available for sale 63,913 39,664 27,814
Held to maturity 54,445 20,791 22,721
Investment securities sales, maturities and payments
Available for sale 34,501 35,131 14,719
Held for maturity 4,705 1,279 -
Assets acquired in settlement of loans 284 139 183
Purchases of:
Mortgage-backed securities
Available for sale (23,952) (22,491) (68,490)
Held to maturity (6,945) (13,711) (36,076)
Investment securities
Available for sale (44,943) (47,958) (19,368)
Held to maturity (2,693) (498) (1,172)
Net cash received in acquisitions 24,606 - 45,139
Net change in retained servicing asset (6,491) - -
Purchase of premises and equipment, net (3,524) (491) (559)
--------- --------- ---------
Net cash used in investing activities: (27,946) (58,510) (124,852)
--------- --------- ---------
Cash flows from financing activities
Net change in deposits 71,450 71,514 2,008
Proceeds from Federal Home Loan Bank advances 110,498 187,700 128,700
Net proceeds from other borrowings (490) 10,865 13,789
Repayments on Federal Home Loan Bank advances (85,774) (170,010) (52,697)
Net change in advance payments by borrowers for taxes and insurance (1,777) 613 519
Repurchase of common and preferred stock (2,381) (1,746) -
Proceeds from issuance of preferred stock - - 11,650
Proceeds from common stock transactions 5,947 48 82
Payment of cash dividends (3,369) (3,186) (2,602)
--------- --------- ---------
Net cash provided by financing activities 94,104 95,798 101,449
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 7,529 16,532 (7,273)
Cash and cash equivalents at beginning of year 27,483 10,951 18,224
--------- --------- ---------
Cash and cash equivalents at end of year $ 35,012 27,483 10,951
--------- --------- ---------
Supplemental information:
Cash paid during the year for:
Interest $ 25,318 20,354 12,994
Income taxes $ 5,427 4,025 4,675
Supplemental schedule of noncash activities:
Transfer of loan balances on foreclosed assets
to assets acquired in settlement of loans $ 426 209 160
</TABLE>
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The accounting and reporting policies of FirstFederal Financial Services
Corp (Corporation) conform to generally accepted accounting principles. The
Corporation has two subsidiaries, First Federal Savings and Loan Association of
Wooster (Association), which is principally engaged in the business of offering
savings deposits through the issuance of savings accounts, money market
accounts, and certificates of deposit and lending or utilizing funds primarily
for the purchase, construction, and improvement of real estate and Mobile
Consultants, Inc. (MCi), which is a broker and servicer of manufactured housing
finance contracts. The deposit accounts of the Association are insured by the
Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC).
The following is a description of the more significant policies which the
Corporation follows in preparing and presenting its financial statements:
(a) Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
the Corporation and its wholly owned subsidiaries, the Association, and MCi. All
significant intercompany balances and transactions are eliminated in
consolidation.
(b) Loan Origination and Commitment Fees
------------------------------------
Loan origination fees and certain direct origination costs are deferred,
and the net fee or cost is recognized as an adjustment to interest income over
the contractual life of the loan using the interest method. Fees received for
loan commitments that are expected to be drawn, based on the Corporation's
experience with similar commitments, are deferred and amortized over the life of
the loan using the interest method. Fees for other loan commitments are deferred
and amortized over the loan commitment period on a straight-line basis. Net
deferred loan fees or costs related to loans paid off or sold are included in
income at the time of sale.
(c) Investments and Mortgage-Backed Securities
------------------------------------------
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Corporation adopted the
provisions of SFAS No. 115 effective January 1, 1994. As required by SFAS No.
115, the Corporation classifies investment securities and mortgage-backed
securities in the following categories at the time of purchase:
TRADING - This classification is used for securities which are held for
resale in anticipation of short-term market movement. The securities
are valued at fair value with gains and losses, both realized and
unrealized, included in income.
HELD TO MATURITY - This classification is used for securities which the
Corporation has the positive intent and ability to hold until maturity.
Such securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts over the remaining lives of the
underlying securities using methods which approximate the interest
method.
AVAILABLE FOR SALE - Those securities not classified as trading or held
to maturity are classified as available for sale; such securities are
carried at fair value, with unrealized gains and losses, net of
deferred income taxes, reported as a separate component of
shareholders' equity.
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities"
(Guide). The Guide deals with various implementation issues regarding SFAS No.
115. A provision of the Guide permitted a one-time reassessment of the
Corporation's classification of all securities between November 15, 1995 and
December 31, 1995. Under this provision a reclassification from the held to
maturity category to another category does not call into question the
Corporation's intent to hold other debt securities to maturity. The Corporation
reclassified $70.7 million of mortgage-backed securities from held to maturity
to available for sale, in connection with the adoption of the Guide. Such
securities had unrealized gains of approximately $600,000 at the time of
transfer.
Realized gains and losses from the sale of securities are computed using
the specific identification method.
On January 1, 1994, the date of adoption of SFAS No. 115, the Corporation
recorded as a component of shareholders' equity an unrealized gain of
approximately $700,000 (net of federal income tax) on the value of the available
for sale securities. During 1996, the amount of $1,293,000 (net of $696,000 in
deferred taxes) was included in shareholders' equity to reflect the net
unrealized holding loss on available for sale investment and mortgage-backed
securities. During 1995 the Corporation recorded an unrealized gain on such
assets of $2,725,000 (net of deferred taxes of $1,467,000), and during 1994 the
Corporation recorded an unrealized loss of $2,578,000 (net of deferred tax
benefit of $1,388,000). Unrealized losses in the amount of $1,146,000 (net of
$617,000 in deferred taxes) and unrealized gains of $147,000 (net of $79,000 in
deferred taxes) are included as a separate component of shareholders' equity at
December 31, 1996 and 1995, respectively.
(d) Loans Held for Sale and Mortgage Servicing Rights
-------------------------------------------------
Loans held for sale are carried at the lower of cost (less principal
payments received) or fair value as determined by outstanding commitments from
investors or current investor yield requirements.
The Corporation generally retains servicing on loans that are sold.
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights. This
pronouncement requires separate recognition of an asset for mortgage servicing
rights based on allocation of total loan cost using relative fair values. The
cost of mortgage servicing rights is amortized in proportion to, and over the
period of, estimated net servicing revenues. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on current market interest rates and
prepayment assumptions. For purposes of measuring impairment, the rights are
stratified based on predominant risk characteristics of the underlying loans
such as interest rates and scheduled maturity. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing rights
exceed their fair value. The Corporation monitors prepayments, and in the event
that actual prepayments exceed original estimates, amortization is adjusted
accordingly. There was no impact on amortization as a result of accelerated
prepayment at December 31, 1996.
(e) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation and amortization of premises and equipment are
calculated on a straight-line basis over the estimated useful lives of the
related assets; estimated lives are 20 to 50 years for buildings and 3 to 20
years for furniture and equipment.
The cost of leasehold improvements is amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
related asset.
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(f) Assets Acquired in Settlement of Loans
--------------------------------------
Assets acquired in settlement of loans represent real estate or other
property acquired through foreclosure or deed in lieu thereof and are carried at
the lower of cost or fair value less costs to sell. Costs relating to the
development and improvement of property are capitalized, whereas those relating
to holding the property are charged to expense.
(g) Federal Income Taxes
--------------------
The Corporation and its subsidiaries file a consolidated federal tax
return. Income taxes are provided for all taxable items included in the
consolidated statements of operations, regardless of when such items are
reported for tax purposes, adjusted for permanent differences.
The Corporation accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled, and the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date. Deferred tax assets must be reduced by
valuation allowances to a more than likely realizable amount.
(h) Cost in Excess of Fair Value of Net Assets Acquired
---------------------------------------------------
The cost in excess of fair value of net assets arising from branch
acquisitions and the acquisition of MCi has been accounted for under the
purchase method. This excess cost is being charged to earnings over an average
life of 10 years by use of the straight-line method. At each statement of
financial condition date, management makes a determination of whether the cost
in excess of fair value of net assets acquired has been impaired based on
various branch operating criteria. Discounts and premiums arising from fair
value adjustments of assets and liabilities acquired are being amortized over
the estimated remaining life of the related asset or liability using the
interest method. Based upon its most recent analysis, the Corporation believes
that the cost in excess of fair value at December 31, 1996 is not impaired and
the amortization period is appropriate.
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which
establishes accounting standards for determining and measuring the impairment of
long-lived assets, certain intangibles, and goodwill. SFAS No. 121 does not
apply to core deposit intangibles and mortgage servicing rights of financial
institutions. The Corporation adopted SFAS No. 121 effective January 1, 1996;
the adoption did not have a material impact on the Corporation's consolidated
financial position or results of operations.
(i) Loans
-----
Loans that the Corporation has the intent and ability to hold until
maturity or payoff are reported at their outstanding principal balances, less
allowances for losses and net deferred origination fees and discounts. Valuation
allowances for estimated losses on loans are provided when a decline in value is
deemed to have occurred. In estimating possible losses, management considers the
remaining principal balance and estimated fair value of the property
collateralizing the loan less estimated selling expenses and holding costs.
The adequacy of the allowance for loan losses is periodically evaluated by
the Corporation based upon the overall portfolio composition and general market
conditions. While management uses the best information available to make these
evaluations, future adjustments to the allowance may be necessary if economic
conditions change substantially from the assumptions used in making the
evaluations. Future adjustments to the allowance may also be required by
regulatory examiners based on their judgments about information available to
them at the time of their examination.
In May 1993, the FASB released SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, which requires that impaired loans be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, if more practicable, based on the loan's market
price or the fair value of the underlying collateral if the loan is
collateral-dependent. In October 1994, the FASB issued SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures,
which amends the disclosure requirements in SFAS No. 114 to require information
about the recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. SFAS No. 118 was
effective concurrent with the effective date of SFAS No. 114. The Corporation
adopted the provisions of SFAS Nos. 114 and 118 effective January 1, 1995; the
adoption did not have a material impact on the Corporation's consolidated
financial position or results of operations.
Under SFAS Nos. 114 and 118, a loan is considered impaired when, based on
current information and events, it is probable that the Corporation will be
unable to collect the scheduled payments of principal and interest according to
the contractual terms of the loan agreement. Since the Corporation's loans are
primarily collateral-dependent, measurement of impairment is based on the fair
value of the collateral. The allowance for loan losses is increased by charges
to income and decreased by charge-offs (net of recoveries) based on the
Corporation's evaluation of impairment of its loans.
(j) Interest Accruals on Nonperforming Loans
----------------------------------------
The Corporation provides an allowance for the possible loss of accrued, but
uncollected, interest on specific loans which are delinquent or in foreclosure
when, in management's opinion, collection becomes doubtful. Such interest
ultimately collected is credited to income in the period of recovery. The
Corporation generally reserves delinquent interest once it becomes more than 90
days past due.
(k) Pension Plan
------------
Pension costs are actuarially determined and are computed in accordance
with SFAS No. 87, Employers' Accounting for Pensions. The Corporation's policy
is to fund the defined benefit pension plan in an amount which is at least the
minimum required amount under the Employee Retirement Income Security Act of
1974, but not in excess of the maximum amount deductible for federal income tax
purposes.
(l) Earnings per Share
------------------
Primary earnings per share are computed based on the weighted average
number of common shares and common stock equivalent shares outstanding during
each year, after giving effect to the reduction of earnings by the dividends
paid on the serial preferred stock and adjusted to reflect the five-for-four
common stock split granted May 20, 1994 and the 10 percent common stock
dividends granted to shareholders on May 22, 1996 and May 22, 1995. Stock
options are included as common share equivalents using the treasury stock
method. The fully diluted earnings per share assumes the conversion of the
cumulative serial preferred stock, Series A, as of October 2, 1992, and Series
B, as of June 24, 1994, the dates of issuance. All share and per share data
presented in the consolidated financial statements and notes thereto have been
restated for the effects of the stock splits.
(m) Paid-In Capital and Retained Earnings
-------------------------------------
The paid-in capital account includes amounts received in excess of par
value of common stock sold. For stock dividends, the Corporation transfers the
market value of shares issued from retained earnings to the common stock and
paid-in capital accounts.
(n) Retained Interest
-----------------
Retained Interest is comprised of two components, excess spread receivable
and over-collateralization. The excess spread receivable is established for each
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
securitization and represents the present value of the gross interest income on
the loans securitized less the pass-through interest paid to the securitization
investors, less provisions for credit losses and prepayments over the life of
the respective securitization, less normal servicing fees and recovery of the
spread account. The excess spread receivable consists of the gain recognized on
the sale of loans through securitization, deferred servicing income and a
deferred gain attributable to the time value of money. Deferred servicing income
is recognized as earned over the life of the related loans in proportion to the
principal paydown of the loans outstanding. The deferred gain attributable to
the time value of money is recognized as earned in relation to the balance of
securitized loans outstanding. The excess spread receivable is reduced by the
receipt of cash from the trusts and the amortization of the deferred gain and
deferred servicing costs. Deferred servicing costs are amortized over the life
of the related loans as a percentage of loans outstanding. Prepayment and loss
experience rates are based upon the nature of the receivables and historic
information available to the Company. Prepayment assumptions and credit loss
provisions are periodically reviewed. Deficiencies, if any, in excess of
estimated reserves, are charged to operations. Favorable experience is
recognized prospectively as realized.
The over-collateralization pool of the securitization facility is to
protect securitization investors against credit losses. Funds in excess of
specified percentages are available to be remitted to the Company over the life
of the securitization. For each securitization, there is no recourse to the
Company beyond the amounts maintained in this account. However, the excess
spread receivable noted above is only available to the Company to the extent
that there is no impairment of the spread account that relates to the
securitization. The Company analyzes the spread account quarterly to determine
if impairment exists. Impairment, if any, is charged to operations.
(o) Stock-Based Compensation
------------------------
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair value method of accounting for stock options
and similar equity instruments. Under the fair value method, compensation cost
is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but not required, to adopt
the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, but are required to disclose in a note to the financial statements
pro forma net earnings and, if presented, earnings per share as if the company
had applied the new method of accounting. The accounting requirements of the new
method are effective for all employee awards granted after the beginning of the
fiscal year of adoption. SFAS No. 123 is effective for fiscal years beginning
after December 31, 1995.
The Corporation has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Corporation's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. Refer to note 16.
(p) Impact of Recent Accounting Pronouncements
------------------------------------------
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, is effective for the Corporation for
transactions occurring after December 31, 1996 and will supersede SFAS No. 122,
Accounting for Mortgage Servicing Rights, which the Corporation adopted
effective January 1, 1996. SFAS No. 122 amended SFAS No. 65, Accounting for
Certain Mortgage Banking Activities, to eliminate the accounting distinction
between rights to service mortgage loans for others that are acquired through
loan origination activities and those acquired through purchase transactions.
Under SFAS No. 122, when the Corporation sells or securitizes loans and retains
the mortgage servicing rights, the total cost of the mortgage loans is allocated
to the mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values, and any cost allocated to mortgage
servicing rights is recognized as a separate asset.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. After a
transfer of financial assets, SFAS No. 125 requires an entity to recognize the
financial and servicing assets it controls and the liabilities it has incurred,
to derecognize financial assets when control has been surrendered, and to
derecognize liabilities when extinguished. It is not expected that SFAS No. 125
will have a material impact on the Corporation's financial statements.
(q) Recognition of Revenue
----------------------
MCi is a servicer and collector of manufactured housing loans, who earns
fees for placing loan contracts with financial institutions. A portion of those
fees are received by MCi upon the closing of transactions, and the remainder are
held as reserves to absorb prepayment credit losses. At 12/31/96, loans serviced
and collected by MCi (excluding loans held by the Association) totaled $438.3
million. Of the fees relating to these loans, $45.9 million are currently being
held in prepayment and credit loss reserves.
The reserves are recognized in income by MCi over the lives of the loans.
Revenues recognized each year are calculated as the present value of future cash
flows, which involves the use of assumptions including prepayment rate, discount
rate, weighted average interest rate and weighted average term. During the year
ended 12/31/96, $3.2 million was recognized by MCi as revenue.
(r) Use of Estimates
----------------
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.
(s) Reclassifications
-----------------
Certain amounts in the accompanying 1995 and 1994 consolidated financial
statements have been reclassified to conform with the 1996 presentation.
(2) COMPLETED AND PENDING ACQUISITIONS
----------------------------------
On April 3, 1996, the Corporation acquired Mobile Consultants, Inc. (MCi),
a broker and servicer of manufactured housing finance contracts located in
Alliance, Ohio. The purchase of MCi was accounted for by the purchase method;
accordingly, the assets and liabilities were recorded at their estimated fair
value at the date of acquisition. The purchase resulted in a cost in excess of
fair value of net assets acquired of approximately $5.6 million which is being
amortized by the straight-line method over ten years. MCi contributed
approximately $3.1 million to the Company's net earnings for the year ended
December 31, 1996. The earnings and expenses were consolidated into the
financial statements and will become a significant part of future operations.
On March 23, 1996, the Association acquired a branch at the corner of High
Street and Gay Street in Mount Vernon, Ohio from Peoples National Bank, Wooster,
Ohio. As part of the transaction, the Association assumed approximately $26.6
million of consumer deposit liabilities at a premium of 9 percent. The purchase
of the branch was accounted for by the purchase method; accordingly, the assets
and liabilities were recorded at their estimated fair value at the date of
acquisition. The purchase resulted in a cost in excess of fair value
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of net assets acquired of $2.4 million, which is being amortized by the
straight-line method over 10 years.
On December 30, 1996, the Corporation entered into a definitive agreement
for the acquisition of the stock of Summit Bancorp (Summit) by FirstFederal.
Under the terms of the agreement, FirstFederal will exchange 1.87 shares of its
common stock for each of the 234,916 shares of Summit stock. Based on the
average of FirstFederal's closing bid and ask price of $39.375 on December 31,
1996, the transaction would be valued at approximately $17.3 million. The
merger, which will be accounted for as a pooling of interests, is expected to be
consummated during the third quarter of 1997, pending Summit shareholder
approval, regulatory approval and other customary conditions of closing. The
transaction is expected to be a tax-free reorganization for federal income tax
purposes. Summit Bancorp's subsidiary, Summit Bank, has two commercial banking
offices located in Summit County, Ohio. At December 31, 1996, Summit had total
assets of $81.3 million, deposits of $67.8 million, and shareholders' equity of
$7.2 million. Summit reported net income of $0.8 million for the year ended
December 31, 1996.
(3) INVESTMENT SECURITIES
---------------------
The following is a summary of investment securities available for sale and
held to maturity (in thousands):
<TABLE>
<CAPTION>
December 31, 1996
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale
U.S. Government and agency obligations $45,430 22 (129) 45,323
Corporate debt 2,435 9 (4) 2,440
------- ------- ------- -------
$47,865 31 (133) 47,763
------- ------- ------- -------
Held to maturity
U.S. Government and agency obligations $ 4,501 12 (45) 4,468
Municipal obligations 1,634 24 - 1,658
Corporate debt 112 - - 112
------- ------- ------- -------
$ 6,247 36 (45) 6,238
======= ======= ======= =======
December 31, 1995
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
U.S. Government and agency obligations $38,731 254 (14) 38,971
Corporate debt 2,989 - (7) 2,982
------- ------- ------- -------
$41,720 254 (21) 41,953
======= ======= ======= =======
Held to maturity
U.S. Government and agency obligations $ 2,502 - (84) 2,418
Municipal obligations 994 26 - 1,020
Corporate debt 299 - - 299
------- ------- ------- -------
$ 3,795 26 (84) 3,737
======= ======= ======= =======
</TABLE>
The amortized cost and fair value of investment securities at December 31, 1996,
by contractual maturity, are shown below (in thousands); expected maturities
will differ from contractual maturities because debt issuers may have the right
to call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Available for sale
Due in one year or less $ 19,952 19,948
Due after one year through five years 25,921 25,814
Due after five years 1,992 2,001
---------- ------
$ 47,865 47,763
---------- ------
Held to maturity
Due after one year through five years 2,763 2,760
Due after five years
3,484 3,478
---------- ------
$ 6,247 6,238
========== ======
</TABLE>
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from sales of investment securities available for sale were
$19,740,000 during 1996, with gross realized gains of $52,000 and gross realized
losses of $31,000 recognized on these sales; $13,685,000 during 1995, with gross
realized gains of $363,000 and gross realized losses of $110,000 recognized; and
$7,494,000 during 1994, with gross realized gains of $161,000 and gross realized
losses of $2,000 recognized.
(4) MORTGAGE-BACKED SECURITIES
The following is a summary of mortgage-backed securities available for sale
and held to maturity (in thousands):
<TABLE>
<CAPTION>
December 31, 1996
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale
GNMA participation certificates $ 6,913 - (99) 6,814
FHLMC participation certificates 12,899 72 (162) 12,809
FNMA participation certificates 25,590 154 (212) 25,532
Collateralized mortgage obligations
and other pass-through certificates 50,043 18 (1,431) 48,630
-------- -------- -------- --------
$ 95,445 244 (1,904) 93,785
======== ======== ======== ========
Held to maturity
GNMA participation certificates $ 1,667 17 (22) 1,662
FHLMC participation certificates 22,016 31 (682) 21,365
FNMA participation certificates 6,723 - (265) 6,458
Collateralized mortgage obligations
and other pass-through certificates 48,331 321 (417) 48,235
-------- -------- -------- --------
$ 78,737 369 (1,386) 77,720
======== ======== ======== ========
December 31, 1995
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
GNMA participation certificates $ 28,941 330 (90) 29,181
FHLMC participation certificates 31,457 489 (95) 31,851
FNMA participation certificates 30,329 171 (79) 30,421
Collateralized mortgage obligations
and other pass-through certificates 84,254 632 (1,365) 83,521
-------- -------- -------- --------
$174,981 1,622 (1,629) 174,974
======== ======== ======== ========
Held to maturity
GNMA participation certificates $ 2,003 36 (4) 2,035
FHLMC participation certificates 25,320 56 (228) 25,148
FNMA participation certificates 7,753 - (149) 7,604
Collateralized mortgage obligations
and other pass-through certificates 51,071 385 (396) 51,060
-------- -------- -------- --------
$ 86,147 477 (777) 85,847
======== ======== ======== ========
</TABLE>
The amortized cost and fair value of mortgage-backed securities at December
31, 1996, by contractual maturity, are shown on the next page (in thousands);
expected maturities will differ from contractual maturities because debt issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Available for sale
Due in one year or less $ 642 637
Due after one year through five years 4,211 4,210
Due after five years 90,592 88,938
------ ------
$ 95,445 93,785
------ ------
Held to maturity
Due after five years 78,737 77,720
------ ------
Total $ 78,737 77,720
====== ======
</TABLE>
Proceeds from sales of mortgage-backed securities available for sale were
$86,515,000 during 1996, with gross realized gains of $822,000 and gross
realized losses of $446,000 recognized on these sales; $33,382,000 during 1995,
with gross realized gains of $142,000 and gross realized losses of $11,000
recognized; and $5,093,000 during 1994, with gross realized gains of $9,000 and
no gross realized losses recognized.
At December 31, 1996, mortgage-backed securities totaling $32,800,000 with
a fair value of $37,623,000 were pledged as collateral for savings held for
municipalities and other government agencies and securities sold under
agreements to repurchase.
(5) RETAINED INTEREST
-----------------
In October 1996, the Corporation securitized $48.9 million of manufactured
housing loans in a private placement of Senior/Subordinated Pass Through
Certificates Series 1996-1. As a result of this securitization, the Corporation
recorded a $6.5 million retained interest, which consists of an
overcollateralization of loans and the unamortized balance of the present value
of the interest rate differential resulting from the sale of loans with
servicing rights retained. The residual interest is amortized over the estimated
life of the underlying loans sold.
The carrying value of the residual interest is analyzed quarterly by the
Corporation to determine whether prepayment and default experience has any
impact on this carrying value.
(6) LOANS RECEIVABLE, NET
---------------------
A summary of loans receivable held for long-term investment consists of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Real estate
Secured by 1-4 family residential properties $ 477,069 400,122
Secured by multifamily properties 4,188 20,188
Secured by construction and development 91,783 72,504
Secured by commercial properties 16,593 26,966
Consumer loans
Secured by manufactured homes 39,020 20,341
Secured by other consumer assets 77,127 52,003
Commercial, financial, and industrial 4,937 6
--------- ---------
710,717 592,130
========= =========
Less
Undisbursed loans in process 36,679 42,888
Deferred loan fees 1,425 1,849
Unearned discount - 3
Allowance for loan losses 2,916 2,994
--------- ---------
41,020 47,734
--------- ---------
Loans receivable, net $ 669,697 544,396
========= =========
</TABLE>
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL
Loans held for sale as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Estimated
Cost Gains Losses Market Value
---- ----- ------ ------------
December 31, 1996
-----------------
<S> <C> <C> <C> <C>
Real estate secured by 1-4 family
residential properties $ 36,440 145 - 36,585
Consumer loans secured by
manufactured homes 50,631 - - 50,631
------ ---- ----- ------
$ 87,071 145 - 87,216
====== ==== ===== ======
December 31, 1995
-----------------
Real estate secured by 1-4 family
residential properties $ 36,664 457 - 37,121
====== ==== ===== ======
</TABLE>
Loans with adjustable rates, included above in loans held for long term
investment, totaled $201,644,000 and $248,160,000 at December 31, 1996 and 1995,
respectively. Substantially all such loans have original maturities of three
years or more or have contractual interest rates that increase or decrease at
periodic intervals. These loans have interest rate adjustment limitations and
are generally indexed to various different nationally published indices. Future
market factors may affect the correlation of the interest rate adjustment with
the rate the Corporation pays on short-term deposits that have been primarily
utilized to fund these loans.
As of December 31, 1996 and 1995, the Corporation was servicing loans for
others aggregating approximately $418,981,000 and $302,371,000, respectively.
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors, and foreclosure
processing. Loan serving income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees. In connection with these loans serviced for others, the
Corporation held escrow balances of $1,667,000 and $1,638,000 at December 31,
1996 and 1995, respectively.
Originated mortgage servicing rights capitalized during the year ended
December 31, 1996, as a result of the adoption of Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights, was
approximately $1,611,000. Fair value of the asset, as determined by market
quotes, approximated carrying value. As a result there was no impairment at
December 31, 1996. Amortization during the period was $108,000.
The Corporation grants residential, construction, consumer, and other loans
to customers within a five-county area of north central Ohio; the economic base
of this region is a mixture of industry and agriculture. The Corporation also
grants manufactured housing loans to individuals in 27 states. Although the
Corporation has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contractual obligations is dependent upon
economic conditions within its market region.
(7) CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
-------------------------------------------------------------------
In the normal course of business, the Corporation is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the accompanying consolidated statements of financial
condition. The contract amounts of these instruments reflect the extent of
involvement the Corporation has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration or other termination clauses and may require payment of a
fee. Since many commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Corporation uses the same credit policies in making commitments as it
does for on-balance-sheet instruments. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation, upon extension of credit is based on
management's credit evaluation of the counterparty.
At December 31, 1996, total commitments to extend credit were $15,935,000
at interest rates of 7.0 percent to 9.0 percent ($14,661,000 at rates of 6.50
percent to 9.75 percent at December 31, 1995). The Corporation has outstanding
commitments of $32,970,000 at December 31, 1996 ($24,034,000 at December 31,
1995) at variable interest rates on unused lines of credit for its equity line
of credit program. The Corporation also has outstanding commitments of
$19,962,000 at December 31, 1996 ($-0- at December 31, 1995) at variable
interest rates on unused commercial lines of credit.
In addition, the Corporation is a defendant in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial condition of the Corporation.
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) ALLOWANCE FOR LOSSES
--------------------
Activity in the allowance for loan losses is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 2,994 3,204 4,512
Provision charged to income 360 - 15
Charge-offs (454) (225) (1,337)
Recoveries 16 15 14
------- ------- -------
Balance at end of year $ 2,916 2,994 3,204
======= ======= =======
</TABLE>
(9) PREMISES AND EQUIPMENT, NET
---------------------------
Premises and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Land $ 1,206 1,198
Buildings 8,590 6,931
Leasehold improvements 512 335
Furniture and equipment 7,276 5,133
------- -------
17,584 13,597
Less accumulated depreciation 7,198 6,155
------- -------
$10,386 7,442
======= =======
</TABLE>
Total rental expense was $248,000, $119,000, and $91,000 during 1996, 1995, and
1994, respectively.
(10) ACCRUED INTEREST RECEIVABLE
---------------------------
Accrued interest consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Loans $4,722 3,670
Mortgage-backed securities 972 1,907
Investment securities 375 707
------ ------
$6,069 6,284
====== ======
</TABLE>
(11) DEPOSITS
--------
Deposit balances by interest rate are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
Deposit Type Amount % Amount %
------------ ------ - ------ -
<S> <C> <C> <C> <C>
Negotiable order of withdrawal (NOW)
Noninterest bearing $ 21,268 3.2% 9,457 1.7%
Interest bearing, 2.00-2.75% 64,863 9.6 57,837 10.1
Passbook savings, 2.75-3.10% 143,382 21.4 125,537 21.9
Money market deposit accounts,
2.50-4.00% 14,464 2.1 13,074 2.2
-------- ----- -------- -----
243,977 36.3 205,905 35.9
-------- ----- -------- -----
Certificates of deposit
Below 5.25% 22,373 3.3 54,528 9.5
5.25-8.00% 392,911 58.5 299,530 52.2
8.01-10.00% 12,191 1.9 13,625 2.4
10.01-13.00% 466 - 453 -
-------- ----- -------- -----
427,941 63.7 368,136 64.1
-------- ----- -------- -----
$671,918 100.0% 574,041 100.0%
======== ===== ======== =====
</TABLE>
The weighted average interest rate on deposits was 4.63 percent and 4.60 percent
at December 31, 1996 and 1995, respectively.
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The contract maturity periods of certificates of deposit are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
Remaining 1996 1995
Term to Maturity Amount % Amount %
---------------- ------ - ------ -
<S> <C> <C> <C> <C>
12 months and under $249,435 58.3% 219,023 59.5%
13 months to 24 months 92,654 21.7 77,925 21.2
25 months to 36 months 41,717 9.7 30,610 8.3
37 months to 48 months 19,360 4.5 16,729 4.5
Over 48 months 24,775 5.8 23,849 6.5
-------- ----- ------- -----
$427,941 100.0% 368,136 100.0%
-------- ----- ------- -----
</TABLE>
Interest expense, aggregated by deposit category, was as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 1,192 942 857
Passbook savings 4,069 3,863 4,578
Money market deposit accounts 483 424 391
Certificates of deposit 23,399 18,889 12,845
--------- ------ ------
$ 29,143 24,118 18,671
========= ====== ======
</TABLE>
At December 31, 1996 and 1995, there were 637 and 333 customer deposits,
respectively, issued in amounts of $100,000 or more, totaling approximately
$147,053,000 and $86,318,000, respectively.
(12) ADVANCES FROM THE FEDERAL HOME LOAN BANK
----------------------------------------
Following is a summary of advances from the Federal Home Loan Bank of
Cincinnati (FHLB) (in thousands):
<TABLE>
<CAPTION>
December 31,
Maturity Interest Rate 1996 1995
-------- ------------- ---- ----
<S> <C> <C> <C>
1996 4.15-7.85% $ - 37,369
1997 4.15-6.55 67,648 68,693
1998 4.40-6.05 38,434 38,474
1999 6.45-6.80 61,000 -
2000 5.60-5.80 56,934 14,400
Thereafter 5.45-8.05 62,780 103,136
--------- -------
$ 286,796 262,072
========= =======
</TABLE>
FHLB advances are secured by a blanket lien on first mortgage loans with
balances totaling 150 percent of such advances. The FHLB stock also serves as
collateral for the advances.
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) OTHER BORROWINGS
----------------
<TABLE>
<CAPTION>
December 31,
(In Thousands)
1996 1995
---- ----
<S> <C> <C>
Reverse repurchase agreements secured
by mortgage-backed securities $20,402 $24,654
Other notes payable 5,215 -
------- -------
Total other borrowings $25,617 $24,654
======= =======
</TABLE>
Following is a summary of securities sold under agreements to repurchase (in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Reverse repurchase agreements secured by mortgage-backed securities
At year-end
Reverse repurchase amount $20,402 24,654
Weighted average interest rate 5.44% 5.85%
Book value of collateral $25,127 26,533
Fair value of collateral 24,514 26,388
During the year
Average agreements outstanding 32,468 23,013
Highest amount outstanding at any month-end 39,915 32,445
Weighted average interest rate 5.47% 5.93%
</TABLE>
The securities underlying the repurchase agreements are book entry
securities delivered to the dealer. Dealers may sell, loan, or otherwise dispose
of such securities to other parties in the normal course of their operations,
but have agreed to resell to the Corporation the identical securities upon the
maturities of the agreements. The amount at risk under these borrowings with any
one dealer is only the actual amount of borrowings against the securities sold
under these agreements. At December 31, 1996, securities sold under agreements
to repurchase generally have an original term to maturity of 90 days.
Other notes payable are comprised of a $4 million note payable, which
matures during 1997, in connection with the aquisition of MCi. The remaining
$1.2 million in notes payable are debts associated with the operation of MCi.
(14) SHAREHOLDERS' EQUITY
--------------------
On October 2, 1992, the Corporation issued 575,000 shares of 7 percent
cumulative convertible preferred stock, Series A, without par value. The stock
was issued at $25.00 per share (net of issuance costs of $900,000) and is
convertible at the option of the holder, at any time, into 1,260,975 shares of
common stock, $1.00 par value, of the Corporation at an initial conversion price
of $11.40 per share. The Series A preferred stock is not redeemable prior to
December 16, 1997, after which date the Corporation may redeem the Series A
preferred stock at prices beginning at $26.00 per share and declining to $25.00
per share after December 15, 2002 plus accumulated, accrued, and unpaid
dividends to the redemption date. The first scheduled cash dividend payment of
$145,360 for the period from date of initial issuance to December 1, 1992 was
paid on the same date; thereafter, cash dividends are payable quarterly on March
1, June 1, September 1, and December 1 of each year.
On June 24, 1994, the Corporation issued 500,000 shares of 6 percent
cumulative convertible preferred stock, Series B, without par value. The stock
was issued at $25.00 per share (net of issuance costs of $900,000) and is
convertible at the option of the holder, at any time, into 611,250 shares of
common stock, $1.00 par value, of the Corporation at an initial conversion price
of $20.45 per share. The Series B preferred stock is not redeemable prior to
June 24, 1999, after which date the Corporation may redeem the Series B
preferred stock at $25.00 per share plus accumulated, accrued, and unpaid
dividends to the redemption date. The first scheduled cash dividend payment of
$153,450 for the period from date of initial issuance to September 1, 1994 was
paid on the same date; thereafter, cash dividends are payable quarterly on
December 1, March 1, June 1, and September 1 of each year. During 1996 and 1995,
the Corporation converted 15,260 and 20,053 shares, respectively, of Series A
preferred stock, and 3,550 and -0- shares, respectively, of Series B preferred
stock into 41,423 and 43,876 shares, respectively, of common stock.
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) REGULATORY CAPITAL
------------------
The Financial Institutions Reform, Recovery and Enforcement Act imposes
stringent capital requirements upon savings institutions (institutions). The
capital standards require institutions to have minimum regulatory tangible
capital equal to 1.5 percent of tangible assets, minimum core capital of not
less than 3 percent of adjusted tangible assets, and risk-based capital of not
less than 8 percent of risk-weighted assets. In conjunction with the risk-based
capital requirement, the Office of Thrift Supervision (OTS) has assigned
risk-weighting factors to all assets and certain commitments which are to be
utilized in computing the amount of required capital.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was
signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1992. In
addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
To be considered "well capitalized," an institution must generally have a
leverage capital ratio of at least 5 percent, a Tier 1 risk-based capital ratio
of at least 6 percent, and a total risk-based capital ratio of at least 10
percent.
Associations whose deposits are insured by the SAIF are required to comply
with certain minimum regulatory capital requirements. If the Association fails
to meet its minimum requirements, the Office of Thrift Supervision (OTS) may
take such actions as it deems appropriate to protect the deposit insurance fund,
the Association and its depositors, and investors. Such actions may include
various operating restrictions, limitations on liability growth, limitations on
deposit account interest rates, and investment restrictions. In measuring their
compliance with the regulatory capital requirements, savings associations must
exclude from tangible, core, and risk-based capital (i) the effect of any
unrealized gains or losses on securities available for sale, and (ii) goodwill;
and may add to risk-based capital any general loan loss allowances, up to 1.25
percent of risk-weighted assets.
At December 31, 1996 and 1995, the Corporation was in compliance with all
of the current applicable regulatory capital requirements as set forth below (in
thousands):
<TABLE>
<CAPTION>
Tier 1 Total
Core/ Risk- Risk-
Tangible Leverage Based Based
Capital Capital Capital Capital
------- ------- ------- -------
<S> <C> <C> <C> <C>
December 31, 1996
Retained earnings $ 71,184 71,184 71,184 71,184
Net unrealized loss on securities available
for sale, net of tax 1,445 1,445 1,445 1,445
Goodwill (4,393) (4,393) (4,393) (4,393)
----------- ----------- ----------- -----------
Equity capital 68,236 68,236 68,236 68,236
General valuation allowances - - - 2,646
Nonincludable assets - - - -
----------- ----------- ----------- -----------
Regulatory capital 68,236 68,236 68,236 70,882
----------- ----------- ----------- -----------
Adjusted total assets 1,063,505 1,063,505 - -
----------- -----------
Risk-weighted assets 614,791 614,791
----------- -----------
Capital ratio 6.42% 6.42% 11.10% 11.53%
Regulatory requirement 1.50% 3.00% - 8.00%
Regulatory capital category
Well capitalized - equal to or greater than 5.00% 6.00% 10.00%
</TABLE>
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Tier 1 Total
Core/ Risk- Risk-
Tangible Leverage Based Based
Capital Capital Capital Capital
------- ------- ------- -------
<S> <C> <C> <C> <C>
December 31, 1995
Retained earnings $ 64,506 64,506 64,506 64,506
Net unrealized loss on securities available
for sale, net of tax (138) (138) (138) (138)
Goodwill (2,574) (2,574) (2,574) (2,574)
--------- --------- --------- ---------
Equity capital 61,794 61,794 61,794 61,794
General valuation allowances - - - 2,608
Nonincludable assets - - - -
--------- --------- --------- ---------
Regulatory capital 61,794 61,794 61,794 64,402
--------- --------- --------- ---------
Adjusted total assets 936,299 936,299 - -
--------- ---------
Risk-weighted assets - - 443,664 443,664
--------- ---------
Capital ratio 6.60% 6.60% 13.93% 14.52%
Regulatory requirement 1.50% 3.00% - 8.00%
Regulatory capital category
Well capitalized - equal to or greater than 5.00% 6.00% 10.00%
</TABLE>
Under current regulations, the Association is not permitted to pay dividends to
the Corporation if its regulatory capital is reduced below regulatory capital
requirements. As a "Tier 1" institution (an institution with capital in excess
of its fully phased-in capital requirements, both immediately before the
proposed capital distribution and on a pro forma basis after giving effect to
such distribution), the Association may make capital distributions, after prior
notice to the OTS, in any calendar year, up to 100 percent of its net earnings
to date during such calendar year plus the amount that would reduce by one-half
its capital surplus ratio at the beginning of the calendar year. The Corporation
received $-0- million and $10.0 million in dividends from the Association during
1996 and 1995, respectively. At December 31, 1996 and 1995, the Association had
total capital of $71.2 million and $64.4 million, respectively, of which $7.4
million and $8.3 million, respectively, was available for distribution to the
Corporation in accordance with OTS guidelines.
Retained earnings at December 31, 1996 includes approximately $3,600,000
for which no provision for federal income taxes has been made. This amount
represents allocations of income during years prior to 1988 to bad debt
deductions for tax purposes only. These qualifying and nonqualifying base year
reserves and supplemental reserves will be recaptured into income in the event
of certain distributions and redemptions. Such recapture would create income for
tax purposes only, which would be subject to the then current corporate income
tax rate. Recapture would not occur upon the reorganization, merger, or
acquisition of the Association, nor if the Association is merged or liquidated
tax-free into a bank or undergoes a charter change. If the Association fails to
qualify as a bank or merges into a nonbank entity, these reserves will be
recaptured into income.
The favorable reserve method currently afforded to thrifts is repealed for
tax years beginning after December 31, 1995. Large thrifts must switch to the
specific charge-off method of Section 166. In general, a thrift is required to
recapture the amount of its qualifying and nonqualifying reserves in excess of
its qualifying and nonqualifying base year reserves. As the Association has
previously provided deferred taxes on the recapture amount, no additional
financial statement tax expense should result from this new legislation.
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) STOCK OPTION PLANS
------------------
The Corporation has a Stock Option and Incentive Plan (Stock Option Plan)
under which shares of common stock are reserved for issuance in connection with
options or other rights granted by the Board of Directors. Under the terms of
the Stock Option Plan, options to purchase shares are granted to key employees
at not less than the fair market value of the shares at the date of grant. The
options are generally exercisable beginning three years after the date of grant
and expire ten years from the date of grant. The Stock Option Plan also allows
stock appreciation rights, restricted stock, and other rights to be granted. The
following table summarizes data concerning the Stock Option Plan:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 182,666 130,338 75,003
Granted 104,500 $ 28.03 53,625 $ 18.41 57,777 $ 16.06
Forfeited (5,927) - (303) - (917) -
Exercised (19,929) $ 28.10 (994) $ 7.48 (1,525) $ 4.55
-------- ------- ------- -------- -------- -------
Outstanding at
end of year 261,310 182,666 130,338
------- ------- -------
Exercisable at
end of year 54,898 36,137 30,322
------- ------- -------
</TABLE>
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the status of the options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Range of Average Remaining
Date Options Exercise Expiration Exercise Contractual
Exercisable Outstanding Price Date Price Life
----------- ----------- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C>
June 15, 1990 2,546 $ 3.46 June 15, 1997 0.03 0.0045
June 20, 1991 3,429 2.73 June 20, 1998 0.04 0.0195
June 19, 1992 6,819 3.96 June 19, 1999 0.10 0.0652
June 19, 1993 5,492 4.05 June 19, 2000 0.09 0.0739
June 18, 1994 6,115 4.55 June 18, 2001 0.11 0.1060
June 16, 1995 4,000 7.48 June 16, 2002 0.11 0.0847
June 15, 1996 26,497 14.05 June 15, 2003 1.42 0.6639
June 21, 1997 52,314 16.06 June 21, 2004 3.22 1.5176
June 14, 1998 30,250 18.41 June 14, 2005 2.13 0.9927
June 20, 1998 17,598 18.41 June 20, 2005 1.24 0.5786
July 31, 1998 2,750 18.41 July 31, 2005 0.19 0.0916
May 29, 1999 25,500 25.00 May 29, 2006 2.44 0.9314
June 13, 1999 71,000 28.25 June 13, 2006 7.68 2.6046
Nov. 21, 1999 7,000 37.00 Nov. 21, 2006 0.99 0.2688
------- ------- ------
261,310 $ 19.79 8.0031 years
</TABLE>
Of the original 375,140 shares restricted for the Stock Option Plan, there
were 94,722 shares available for future grant at December 31, 1996.
On April 21, 1994, the shareholders of the Corporation adopted a
Non-Employee Director Stock Option Plan (Director Plan) for the non-employee
directors who were serving on the Corporation's Board of Directors. The Director
Plan authorizes the grant of nonstatutory options for the directors' purchase of
151,250 shares of common stock. Each member of the Board of Directors who was
not an officer or employee of the Corporation was granted a one-time,
nonqualified option to purchase 3,781 shares at the exercise price of $16.03 per
share, the price of the stock at the date of grant. The options expire upon the
earlier of ten years following the date of grant, three months following the
date of death, or on the date the optionee ceases to be a director for any
reason other than death. Of the original 151,250 shares restricted for the
Director Plan, there were 112,290 shares available for future grant at December
31, 1996. The following table summarizes data concerning the Director Plan.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------------------------- -------------------------------- ------------------------------
Number of Weighted Average Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- ---------------- --------- ----------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 32,360 - 23,890 - - -
Granted 6,600 $ 21.36 8,470 $15.18 23,890 $16.03
Forfeited - - - - - -
Exercised (2,420) 15.34 - - - -
------- ------ ------ ------
Outstanding at
end of year 36,540 32,360 23,890
====== ====== ======
</TABLE>
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
made: risk free interest rate of 6.25 percent; divident yield of 1.78 percent;
expected lives of 10 years for options; and volatility of 39 percent.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its Stock Option Plan and Non-Employee Director Stock Option Plan. Had
compensation cost for the Corporation's two stock-based compensation plans been
determined consistent with FASB Statement No. 123, the Corporation's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
As Pro As Pro
Reported Forma Reported Forma
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Net income $9,850 9,412 9,446 9,209
Primary earnings per share 2.28 2.16 2.31 2.24
Fully diluted earnings
per share 1.78 1.70 1.78 1.73
</TABLE>
Restricted stock is awarded to key employees who are determined by a
committee of disinterested directors of the Corporation. Terms and conditions
under which stock is restricted, are also determined by the committee. During
1996, the Corporation granted 45,000 in restricted stock awards. The stock vests
at a rate of 20% per year, commencing on January 31, 1997, and on each January
31 through January 31, 2001, provided that the Corporation attains a return on
average equity of 15% or greater in the immediately preceeding year. The
Corporation did not meet the return on equity goal for 1996, as such no
compensation and expense was recorded relating to the awards during the year
ended 12/31/96.
(17) Employee Benefit Plans
----------------------
The Association has a noncontributory defined benefit pension plan (Pension
Plan) under which employees, depending on age and service, are eligible for
participation. It is the Corporation's policy to fund pension costs as accrued.
At December 31, 1996, the Pension Plan was terminated, and the benefit
obligations for the Association's employees were transferred to the 401(k)
savings and investment plan. There was no significant loss incurred as a result
of the termination of the Pension Plan.
The following table sets forth the Pension Plan's funded status and amount
recognized in the Corporation's consolidated statements of financial condition
(in thousands):
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations
Accumulated benefit obligation, including vested
benefits of $2,409 and $2,371, respectively $2,592 2,512
====== =====
Projected benefit obligation $3,176 3,135
Plan assets at fair value 2,736 2,533
------ -----
Plan assets less than projected
benefit obligation (440) (602)
Unrecognized net loss subsequent to transition 582 797
Unrecognized prior service costs (260) (293)
Unrecognized net assets being recognized over
employees' average remaining service life (77) (104)
------ -----
Accrued pension expense $ (195) (202)
====== =====
</TABLE>
Net periodic pension expense included the following components (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost $ 147 140 131
Interest cost on projected benefit obligation 218 219 204
Actual return on plan assets (188) (181) (165)
Net total of other components (34) (45) (3)
----- ---- ----
Net periodic pension expense $ 143 133 167
===== ==== ====
</TABLE>
Significant assumptions used in determining Pension Plan obligations and net
periodic pension expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected long-term rate of return on assets 7.50% 8.00% 7.50%
Weighted average discount rate 7.25 7.25 7.00
Rate of increase in future compensation 4.50 4.50 5.00
</TABLE>
The Association's voluntary 401(k) savings and investment plan (401(k)
Plan), covers substantially all employees with at least one year of service.
Under the 401(k) Plan, the Association matches 50 percent of employee
contributions up to 4 percent of the employee's gross monthly salary. Employee
contributions are invested by the trustees in four investment funds as directed
by the employee. Vesting is immediate. Expenses recorded for the 401(k) Plan
totaled $100,000, $60,000, and $54,000 in 1996, 1995, and 1994, respectively.
MCi also has a profit-sharing plan which covers substantially all of its
employees. MCi's contributions to the plan are at the discretion of the board of
directors and are expensed in the year to which the contributions relate.
Approximately $388,000 was recognized as an expense pertaining to this plan for
the year ended December 31, 1996.
The Corporation does not provide any postretirement benefits that are
subject to the provisions of SFAS No. 106, Employers' Accounting for
Post-Retirement Benefits Other Than Pensions. The FASB has also issued SFAS No.
112, Employers' Accounting for Postemployment Benefits; the Corporation does not
provide any postemployment benefits that are subject to this standard.
(18) Federal Income Taxes
--------------------
The components of the income tax provision are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current federal income taxes $ 874 4,516 3,737
Current state and local income taxes 283 - -
Deferred federal income taxes 4,727 430 753
------ ----- -----
Applicable income tax expense 5,884 4,946 4,490
Deferred federal tax expense (benefit) on unrealized
losses on securities available for sale (622) 79 (1,388)
------ ----- -----
Total $5,262 5,025 3,102
====== ===== =====
</TABLE>
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the amount of expected income tax expense using the federal
corporate statutory rate and the actual income tax expense follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
% of % of % of
Pretax Pretax Pretax
Amount Earnings Amount Earnings Amount Earnings
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $ 5,507 35.0% 5,037 35.0% 4,729 35.0%
Increase (decrease) in taxes
resulting from
State & local income taxes,
net of federal benefit 184 1.1 - - - -
Goodwill amortization 148 1.0 - - - -
Miscellaneous items, net 45 .3 (91) (.6) (239) (1.7)
------- ------- ----- ---- ----- -----
Total tax expense $ 5,884 37.4% 4,946 34.4% 4,490 33.3%
======= ======= ===== ==== ===== ====
</TABLE>
The net tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets
Loan loss reserves $ 758 163
Deferred loan fees net of costs - 647
Basis differences-- fixed assets 367 -
Other assets 328 339
------ ------
Total gross deferred tax assets 1,453 1,149
------ ------
Deferred tax liabilities
Unrealized gain on loans and securities available for sale 594 79
FHLB stock dividends 1,438 1,067
Originated servicing rights 526 -
Depreciation - 120
Deferred loan fees net of costs 3,030 488
Tax bad debt reserves over base year reserves 654 -
Deferred gain on sale of loans 535 -
Other net liabilities 13 5
------ ------
Total gross deferred tax liabilities 6,790 1,759
------ ------
Net deferred tax liability $5,337 610
====== ======
</TABLE>
No valuation allowance for deferred tax assets was recorded as of December
31, 1996 and 1995, as management believes that the amounts representing future
deferred tax benefits will more likely than not be recognized since the
Corporation is expected to have sufficient taxable income to allow for
utilization of the future deductible amounts.
(19) Fair Value of Financial Instruments
-----------------------------------
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Corporation using information provided by
the OTS, available market information, and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Corporation 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.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value and estimated fair value of the Corporation's financial
instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 35,012 35,012 27,483 27,483
Investment securities
Available for sale 47,763 47,763 41,953 41,953
Held to maturity 6,247 6,238 3,795 3,737
Mortgage-backed securities
Available for sale 93,785 93,785 174,974 174,974
Held to maturity 78,737 77,720 86,147 85,847
Retained interest 6,491 6,491
Loans held for sale 87,071 87,216 36,664 37,121
Loans receivable 669,697 667,714 544,396 555,206
Accrued interest receivable 6,069 6,069 6,284 6,284
Stock in Federal Home Loan Bank
of Cincinnati 17,485 17,485 14,172 14,172
---------- ---------- ---------- ----------
$1,048,357 1,045,493 935,868 946,777
========== ========== ========== ==========
FINANCIAL LIABILITIES
Deposits $ 671,918 692,049 574,041 562,371
Advances from the Federal Home
Loan Bank 286,796 286,995 262,072 264,739
Other borrowings 25,617 25,617 24,654 24,654
---------- ---------- ---------- ----------
$ 984,331 1,004,661 860,767 851,764
========== ========== ========== ==========
December 31,
1996 1995
---- ----
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Unrecognized financial instruments
Commitments to extend credit $ 15,935 69 14,661 (375)
========== ========== ========== ==========
</TABLE>
CASH AND CASH EQUIVALENTS. The fair value for cash on hand and in other
financial institutions is book value (both noninterest and interest-bearing),
due to the short maturity of and negligible credit concerns within those
instruments.
INVESTMENT SECURITIES. The fair value for investment securities is based on
available market quotes. If no market quote is available, fair value is
approximated by using the market price of a similar security.
MORTGAGE-BACKED SECURITIES. The fair value for mortgage-backed securities is
based upon quoted market prices where available. For mortgage-backed securities
not widely traded, the fair value is estimated using quoted market prices for
similar securities. Retained Interest. Based on the assumptions used to
calculate the retained interest, carrying value is a reasonable estimate of fair
value at December 31, 1996.
LOANS HELD FOR SALE. Loans held for sale are generally fixed-rate mortgage
loans. The fair value for such loans is based on quoted market prices of
securities collateralized by similar loans.
LOANS RECEIVABLE. The fair value of fixed-rate loans and adjustable rate loans
is estimated by discounting the projected cash flows using the current rate at
which similar loans would be made to borrowers with similar credit ratings and
for the same maturities. For all loans, prepayment assumptions were obtained
from the most current market dealer median prepayments published.
ACCRUED INTEREST RECEIVABLE. The carrying amount is a reasonable estimate of
fair value.
STOCK IN FEDERAL HOME LOAN BANK OF CINCINNATI. The fair value of FHLB stock is
estimated to be equal to par value, as all transactions in such stock are
executed at par.
DEPOSITS. The fair value of deposits with no stated maturity (such as
noninterest bearing deposits, NOW accounts, savings accounts, and money market
accounts) is, by definition, equal to the amount payable on demand (i.e., their
carrying amount). The fair value of fixed-rate certificates of deposit is based
on the discounted value of cash flows using current rates offered for deposits
of similar remaining maturities. The fair value of core deposits does not
include the benefits commonly referred to as a core deposit intangible resulting
from low-cost funding compared to the cost of borrowing funds in the financial
markets, nor is such benefit recorded as an intangible asset on the consolidated
statements of financial condition.
BORROWINGS. The fair value of adjustable rate borrowings that reprice frequently
is approximately their carrying value. The fair value of long-term borrowings is
calculated based on the discounted value of contractual cash flows, using rates
currently available to the Corporation for borrowings for debt with similar
terms and remaining maturities.
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. The fair value of commitments to
extend credit is estimated using the fees currently charged to enter into
similar agreements, taking into account market interest rates, the remaining
terms, and present creditworthiness of the counterparties.
(20) Selected Quarterly Financial Data (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1996
(Dollars in thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest and dividend income $ 17,271 17,967 18,881 19,440
Interest expense 11,025 11,473 12,382 13,168
Provision for losses on loans 90 90 90 90
Earnings before federal income taxes 3,890 5,324 1,289 5,231
Net earnings 2,552 3,351 782 3,165
Net earnings applicable to common stock 2,117 2,921 365 2,751
Net earnings per common share
Primary .63 .80 .10 .75
Fully diluted .47 .60 .14 .57
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest and dividend income $ 15,336 16,057 16,596 16,933
Interest expense 9,260 10,024 10,763 10,999
Provision for losses on loans - - - -
Earnings before federal income taxes 3,610 3,650 3,442 3,690
Net earnings 2,352 2,401 2,273 2,420
Net earnings applicable to common stock 1,897 1,947 1,835 1,981
Net earnings per common share
Primary .57 .59 .55 .60
Fully diluted .44 .45 .44 .45
</TABLE>
(21) Parent Company
--------------
Condensed financial information of FirstFederal Financial Services Corp (parent
company only) is as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
Condensed Statements of Financial Condition 1996 1995
---- ----
<S> <C> <C>
Assets
Cash on hand and in financial institutions $ 1,784 131
Investment securities available for sale 2,934 11,923
Investment in subsidiaries, at equity in underlying value of net assets 84,481 64,510
Other Assets 2,788 -
------- -------
$91,987 76,564
======= =======
Liabilities and shareholders' equity
Accrued liabilities $ 6,700 31
Shareholders' equity 85,287 76,533
------- -------
$91,987 76,564
======= =======
</TABLE>
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
Condensed Statements of Operations 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income
Interest on investments $ 407 240 277
Dividends from subsidiaries 1,000 10,000 -
-------- -------- --------
Total income 1,407 10,240 277
Expenses 597 194 137
-------- -------- --------
Income before equity in undistributed
income of subsidiaries 810 10,046 140
Equity in undistributed income of subsidiaries 9,040 (600) 8,881
-------- -------- --------
Net earnings $ 9,850 9,446 9,021
======== ======== ========
Condensed Statements of Cash Flows
Cash flows from operating activities
Net earnings $ 9,850 9,446 9,021
Adjustments to reconcile net earnings to net cash
provided by operating activities
Change in other assets and liabilities (1,754) (81) (40)
Equity in undistributed income of subsidiaries (9,040) 600 (8,881)
-------- -------- --------
Net cash provided by operating activities (944) 9,965 100
-------- -------- --------
Cash flows from investing activities
Distribution of capital to subsidiaries - - (5,000)
Purchases of investment securities (9,415) (10,010) (5,890)
Investment securities sales or maturities 18,404 4,434 1,750
-------- -------- --------
Net cash used in investing activities 8,989 (5,576) (9,140)
-------- -------- --------
Cash flows from financing activities
Equity invested in MCi (10,589) _ _
Issuance of debt from acquisition 4,000 _ _
Repurchase of common and preferred stock (2,381) (1,746) -
Proceeds from issuance of stock 5,588 - 11,650
Proceeds from common stock transactions 359 48 82
Cash dividends paid (3,369) (3,186) (2,602)
-------- -------- --------
Net cash provided by (used in)
financing activities (6,392) (4,884) 9,130
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,653 (495) 90
Cash and cash equivalents at beginning of year 131 626 536
-------- -------- --------
Cash and cash equivalents at end of year $ 1,784 131 626
======== ======== ========
</TABLE>
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Board of Directors and Shareholders
FirstFederal Financial Services Corp
Wooster, Ohio:
We have audited the accompanying consolidated statement of financial
condition of FirstFederal Financial Services Corp and subsidiaries as of
December 31, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of the
Corporation as of December 31, 1995, and for the years ended December 31, 1995
and 1994, were audited by other auditors whose report thereon, dated January 26,
1996, expressed an unqualified opinion on those statements, and referred to the
adoption of the provisions of Statements of Financial Accounting Standards Nos.
114, Accounting by Creditors for Impairment of a Loan, and 118, Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures, in
1995.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstFederal
Financial Services Corp and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Corporation adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards Nos. 121, and Accounting and for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
122, Accounting for Mortgage Servicing Rights, in 1996.
/s/ KPMG Peat Marwick LLP
Cleveland, Ohio
January 27, 1997
<PAGE> 35
FIRSTFEDERAL FINANCIAL SERVICES CORP
BOARD OF DIRECTORS
Steven N. Stein President, Belvedere Corporation, Cincinnati,
Ohio
[PHOTO]
Gary G. Clark Chairman of the Board, President and Chief
Executive Officer FirstFederal Financial Services Corp,
Wooster, Ohio
Robert F. Belden President, The Belden Brick Company, Canton,
Ohio
Richard E. Herald retired Chief Executive Officer FirstFederal
Financial Services Corp, Wooster, Ohio
[PHOTO]
Gust B. Geralis President, Mighty Associates Inc., Medina,
Ohio
Ronald A. James, Jr. President, Mobile Consultants, Inc.,
Alliance, Ohio.
L. Dwight Douce Executive Vice President, FirstFederal
Financial Services Corp, Wooster, Ohio
[PHOTO]
Daniel H. Plumly Member, Critchfield, Critchfield & Johnston
Ltd., Attorneys at Law, Wooster, Ohio
R. Victor Dix President and Publisher of the Wooster Daily
Record and Vice President and Director of Wooster Republican
Printing Company, Wooster, Ohio
SENIOR MANAGEMENT OF SUBSIDIARIES
<TABLE>
<CAPTION>
[PHOTO] [PHOTO] [PHOTO]
<S> <C> <C>
James H. Ditch Senior Vice President- L. Dwight Douce President and Chief Ronald A. James, Jr. President,
Lending, First Federal Savings and Loan Operating Officer, First Federal Savings and Mobile Consultants, Inc.
Association of Wooster Loan Association of Wooster Jeff Meek Executive Vice President,
Mobile Consultants, Inc.
Donald F. DuBois Senior Vice President, Gary G. Clark Chairman and Chief Executive
First Federal Savings and Loan Association Officer, First Federal Savings and Loan
of Wooster Association of Wooster
Cindy J. Hahn Senior Vice President- James J. Little Executive Vice President and
Marketing, First Federal Savings and Loan Chief Financial Officer, First Federal Savings
Association of Wooster and Loan Association of Wooster
Bryan K. Fehr Senior Vice President-Human
Resources, First Federal Savings and Loan
Association of Wooster
</TABLE>
<PAGE> 36
Corporate and Shareholder
Information
<TABLE>
<S> <C>
CORPORATE AND SHAREHOLDER INFORMATION Market Makers
Corporate Office The following firms make a market in
135 East Liberty Street FirstFederal Financial Services Corp's
Wooster, Ohio 44691 Stock:
- -------------------------------------------
Common Stock Listing McDonald & Company Securities, Inc.
FirstFederal Financial Services Corp's Cleveland, OH
common stock is traded on the NASDAQ Everen Securities, Inc.
Stock Market under the symbol FFSW. Chicago, IL
- ------------------------------------------- The Ohio Company
Preferred Stock Listing Columbus, OH
FirstFederal Financial Services Corp's Sandler O'Neill & Partners
Cumulative Convertible Preferred Stock, New York, NY
Series A, is traded on the NASDAQ Stock Keefe, Bruyette & Woods, Inc.
Market under the symbol FFSWP. The New York, NY
Corporation's Cumulative Convertible ------------------------------------------
Preferred Stock, Series B, is traded Investor Relations
under the symbol FFSWO Connie S. Strock, Vice President
- ------------------------------------------- 1-800-833-7111 or 330-264-8001
Transfer Agent ------------------------------------------
Form 10-K
ChaseMellon Shareholder Services, L.L.C A copy of Form 10-K is available without
charge upon written request to:
Pittsburgh, PA FirstFederal Financial Services Corp,
- ------------------------------------------- Investor Relations Department,
Independent Auditors P.O. Box 385, Wooster, OH 44691
KPMG Peat Marwick, LLP ------------------------------------------
Cleveland, OH Dividend Reinvestment
- ------------------------------------------- A plan is available to common
Corporate Counsel shareholders whereby they may acquire
Critchfield, Critchfield & Johnston, Ltd. additional shares free of commissions and
Wooster, OH fees. For information, contact:
- ------------------------------------------- FirstFederal Financial Services Corp,
Special Counsel Investor Relations Department,
Silver, Freedman & Taff, L.L.P. P.O. Box 385, Wooster, OH 44691
Washington, DC ------------------------------------------
Annual Meeting
FirstFederal's Annual Meeting of
Shareholders will be held on Wednesday,
April 16, 1997 at 9:00 AM at Black Tie
Affair Conference Center, 50 Riffel Road,
Wooster, OH
</TABLE>
<PAGE> 37
Market
Information
Common Stock
- ------------
FirstFederal Financial Services Corp's common stock (symbol: FFSW) is
traded on the NASDAQ Stock Market. At December 31, 1996, its 3,624,710
outstanding shares were owned by approximately 1,300 shareholders of record. The
closing price on December 31, 1996 was $38.875.
Preferred Stock
- ---------------
FirstFederal Financial Services Corp's 7% Cumulative Convertible Preferred
Stock, Series A (symbol: FFSWP) began trading on the NASDAQ Stock Market on
October 9, 1992. At December 31, 1996, there were 498,287 shares outstanding
which were held by approximately 200 shareholders of record. The closing price
on December 31, 1996 was $89.50.
FirstFederal Financial Services Corp's 6 1/2% Cumulative Convertible Preferred
Stock, Series B (symbol: FFSWO) began trading on the NASDAQ Stock Market on June
24, 1994. At December 31, 1996, there were 479,327 shares outstanding which were
held by approximately 150 shareholders of record. The closing price on December
31, 1996 was $50.50.
High and low stock prices for each quarter of 1995 and 1996 were:
<TABLE>
<CAPTION>
Common Stock Preferred Stock Series A Preferred Stock Series B
- -------------------------------------------------------------------------------------------------------------------
High Low Dividend High Low Dividend High Low Dividend
- -------------------------------------------------------------------------------------------------------------------
1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Qtr. $18.18 $15.91 $.10 $40.25 $36.00 $.4375 $27.00 $26.00 $.4063
2nd Qtr. $19.09 $15.80 $.11 $45.00 $38.50 $.4375 $27.00 $26.00 $.4063
3rd Qtr. $19.09 $18.18 $.11 $52.25 $42.50 $.4375 $28.00 $26.25 $.4063
4th Qtr. $22.73 $21.14 $.11 $53.00 $50.00 $.4375 $30.00 $27.00 $.4063
- -------------------------------------------------------------------------------------------------------------------
1996
1st Qtr. $23.41 $21.82 $.11 $55.00 $52.00 $.4375 $30.00 $28.00 $.4063
2nd Qtr. $29.25 $22.50 $.12 $66.75 $53.00 $.4375 $39.00 $28.50 $.4063
3rd Qtr. $31.50 $29.25 $.12 $74.00 $66.50 $.4375 $41.63 $37.00 $.4063
4th Qtr. $40.00 $30.25 $.12 $89.50 $72.50 $.4375 $50.88 $40.75 $.4063
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Market prices and dividend per share information have been adjusted to
reflect the 10% common stock dividend effective May 22, 1995 and the 10%
common stock dividend effective May 22, 1996.
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Date and Percent of
Voting Shares,
Year and Partnership Interests,
State Voting Trust Certificates,
Name and Address Incorporated Capital Contributions Description of Activity
- --------------------------- ------------ --------------------- -------------------------
<S> <C> <C> <C>
First Federal Mortgage Service Inc.(1) Ohio 1978 100% Mortgage loan origination
1978
First Federal Capital Corp. I(1) Delaware 1986 100% CMO Issue
1986
Home Financial Services Corp.(1) Ohio 1988 100% Securities product sales
1988
H.F.S. Agency, Inc.(1) Ohio 1989 95% Tax-deferred annuity sales
1989
Professional Appraisal Services Corp.(1) Ohio 1993 100% Appraisal services
1993
Venture Mortgage Corp.(1) Ohio 1995 100% Operating subsidiary
1995
FirstFed Corp(1) Delaware 1996 100% Securitization Issue
1996
Mobile Consultants, Inc. Ohio 1996 100% Origination and servicing of
1973 manufactured housing loans
<FN>
(1) Subsidiaries of First Federal Savings and Loan Association of Wooster, subsidiary of the Registrant.
</TABLE>
<PAGE> 1
Exhibit 23.1
The Board of Directors
FirstFederal Financial Services Corp and Subsidiaries:
We consent to incorporation by reference in the registration statements (No.
33-48246 and No. 33-87046) on Form S-8 of FirstFederal Financial Services Corp
of our report dated January 27, 1997, relating to the consolidated financial
condition of FirstFederal Financial Services Corp and subsidiaries as of
December 31, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended, which report
appears in the December 31, 1996 annual report on form 10-K of FirstFederal
Financial Services Corp.
Our report refers to the adoption of the provision of the Financial Accounting
Standard Boards' Statements of Financial Accounting Standards Nos. 121,
Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of, and 122, Accounting for Mortgage Servicing rights, in 1996.
/s/ KPMG Peat Marwick LLP
Cleveland, Ohio
March 21, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
FirstFederal Financial Services Corp
We consent to the incorporation by reference in these Registration Statements
No. 33-48246 and No. 33-87046 of FirstFederal Financial Services Corp on Form
S-8 of our report dated January 26, 1996 appearing in this Annual Report on
Form 10-K of FirstFederal Financial Services Corp for the year ended December
31, 1996.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED CONDENSED BALANCE SHEET AND STATEMENT OF INCOME FOR
THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,012,000
<INT-BEARING-DEPOSITS> 9,000,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 141,548,000
<INVESTMENTS-CARRYING> 84,984,000
<INVESTMENTS-MARKET> 83,958,000
<LOANS> 756,768,000
<ALLOWANCE> 2,916,000
<TOTAL-ASSETS> 1,080,383,000
<DEPOSITS> 671,918,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,765,000
<LONG-TERM> 312,413,000
<COMMON> 4,053,000
22,693,000
0
<OTHER-SE> 58,541,000
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<INTEREST-INVEST> 17,285,000
<INTEREST-OTHER> 0
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<INTEREST-DEPOSIT> 29,143,000
<INTEREST-EXPENSE> 48,048,000
<INTEREST-INCOME-NET> 25,511,000
<LOAN-LOSSES> 360,000
<SECURITIES-GAINS> 397,000
<EXPENSE-OTHER> 27,346,000
<INCOME-PRETAX> 15,734,000
<INCOME-PRE-EXTRAORDINARY> 9,850,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,850,000
<EPS-PRIMARY> 2.28
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 2.53
<LOANS-NON> 3,590,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 340,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,994,000
<CHARGE-OFFS> 454,000
<RECOVERIES> 16,000
<ALLOWANCE-CLOSE> 2,916,000
<ALLOWANCE-DOMESTIC> 2,916,000
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</TABLE>
<PAGE> 1
EXHIBIT 99
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of FirstFederal Financial Services
Corp.
Wooster, Ohio
We have audited the consolidated statements of financial condition of
FirstFederal Financial Services Corp and Subsidiary (the "Corporation") as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995, These consolidated financial statements are
the responsibility of the Corporations's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
FirstFederal Financial Services Corp and Subsidiary at December 31, 1995 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 Corporation changed its method of accounting for certain investments
in debt and equity securities to conform with Statement of Financial Accounting
Standard No. 115.
/s/ Deloitte & Touche LLP
January 26, 1996
Columbus, Ohio
