-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KvfMaHDOML54M71N2ftj+YuJQzFBlV7QxMvoVB9EJPh6lLzyoBtLhLLrUbCmxUsP lDJVRT2+gYGtqoIhDYnJzA== 0000950152-97-002172.txt : 19970326 0000950152-97-002172.hdr.sgml : 19970326 ACCESSION NUMBER: 0000950152-97-002172 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FEDERAL FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0000846814 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341622711 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17894 FILM NUMBER: 97562801 BUSINESS ADDRESS: STREET 1: 135 E LIBERTY ST CITY: WOOSTER STATE: OH ZIP: 44691 BUSINESS PHONE: 2162648001 MAIL ADDRESS: STREET 1: 135 E LIBERTY ST CITY: WOOSTER STATE: OH ZIP: 44691 FORMER COMPANY: FORMER CONFORMED NAME: FIRSTFED FINANCIAL CORP/OH DATE OF NAME CHANGE: 19890731 10-K405 1 FIRST FEDERAL FINANCIAL 10-K405 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:
Title of each class: Name of each exchange on which registered: ------------------- ----------------------------------------- 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
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. 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 3 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 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 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 6
AT DECEMBER 31, ------------------------------------------------------------------------------------- 1996 1995 1994 1993 --------------------- -------------------- -------------------- --------------------- Amount Percent Amount Percent Amount Percent Amount Percent ---------- --------- -------- --------- --------- --------- -------- --------- (Dollars in Thousands) Type of Loan - ------------ 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% ======== ======== ======== ======== ======== ======== ======== ======== ------------------- 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% ======== ======== (1) Comprised of substantially all one- to four-family residential mortgage loans. (2) Includes commercial, financial and industrial loans.
6 7 The following table presents a reconciliation of the Company's loans receivable and loans held for sale, after net items:
AT DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (IN THOUSANDS) 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 ======== ======== ======== ======== ========
7 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.
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, - -------------------- 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% ======== ======== ======== ======== ======== ======== ======== ======== (1) Includes manufactured housing loans with typical maturities exceeding five years, as well as demand loans and loans having no stated maturity.
8 9 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.
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 -------- --------- -------- (In Thousands) 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 ======== ======== ========
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 9 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 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 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 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 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 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.
AT DECEMBER 31, --------------------------------------------------------- 1996 1995 ----------------------------- -------------------------- Amount Percent of Amount Percent of Contractually Total Loans, Contractually Total Loans, Delinquent Net Delinquent Net --------------- ------------ ------------- ------------ (Dollars in Thousands) 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% ====== ==== ====== ====
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 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.
AT DECEMBER 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) 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% ====== ====== ====== ====== ======
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 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 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.
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Allowance for Loan Losses - ------------------------- 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
18 19 The table below sets forth the allocation of the allowance for loan losses by loan category at the dates indicated.
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) 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% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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 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.
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) 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% ======== ==== ======= ==== ======= ==== ======= ==== ======== ==== - ---------------- (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.
20 21 The following table sets forth the composition of the Association's mortgage-backed securities and investment portfolios at the dates indicated.
AT DECEMBER 31, 1996 1995 1994 ---------------------- ---------------------- ----------------------- BOOK % OF BOOK % OF BOOK % OF VALUE TOTAL VALUE TOTAL VALUE TOTAL --------- --------- ---------- ---------- ----------- --------- (DOLLARS IN THOUSANDS) 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
21 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 23 The principal types of savings accounts and average rates paid by the Association at the dates indicated are summarized as follows:
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) 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% ======== ======== ======== ======== ======== ======== ======== ======== ========
23 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.
PASSBOOK, NOW AND MONEY CERTIFICATES MARKET MATURITY PERIOD OF DEPOSITS ACCOUNTS - --------------------------------- --------------- ----------- (IN THOUSANDS) 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 ======= =======
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.
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994 ------------- --------------- ----------- (IN THOUSANDS) 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 ========= ========= ========= - ------------------ (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.
24 25 The following table sets forth the amount, by interest rates, of total deposits at the Association as of the dates indicated.
AT DECEMBER 31, --------------------------------------------- 1996 1995 1994 ----------- ----------- ------------- (IN THOUSANDS) 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 ======== ======== ========
The following table sets forth the amounts of certificates of deposits maturing during the years indicated.
AMOUNTS MATURING WEIGHTED AVERAGE IN THE YEAR RATE ------------------- ------------------- (DOLLARS IN THOUSANDS) 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% ======== ====
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 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.
AT OR FOR THE YEAR ENDED DECEMBER, 31 ----------------------------------------------------- 1996 1995 1994 ----------------------------------------------------- (DOLLARS IN THOUSANDS) 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%
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 26 27 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 27 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 28 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 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. 30 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 31 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 32 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. 33 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 34 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 35 36 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 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 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 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 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 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." 41 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 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 43 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. 44 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.
Net Book Value of Land Buildings, Year Owned Estimated Improvements, Originally or Square Feet of Furniture and Fixtures Location Opened Leased Space (in Thousands) - ------------------------------------- ------------ ---------- ---------------- --------------------------- 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
45 46
Net Book Value of Land Buildings, Year Owned Estimated Improvements, Originally or Square Feet of Furniture and Fixtures Location Opened Leased Space (in Thousands) - ------------------------------------- ------------ ---------- ---------------- --------------------------- 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
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. 46 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. 47 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 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 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:
PAGES IN THIS REPORT ----------- 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............................................................ __-__
(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 51 (a)(3) Exhibits --------
REGULATION S-K EXHIBIT REFERENCE TO NUMBER PRIOR FILING OR - ------------------ EXHIBIT NUMBER DOCUMENT ATTACHED HERETO ------------------------------------------------------- --------------- 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
51 52 99 Additional Exhibits -- report of predecessor 99 independent accountants
* 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 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.
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 ------------------------------------ ------------------------------------
EX-3.I 2 EXHIBIT 3(I) 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. 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- 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- 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- 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- 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- 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- 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- 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- 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. -10- 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 -11- 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. -12- 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). -13- 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 -14- 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 -15- 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, 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. -2- 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: -3- 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 -4- 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. -5- 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 -6- 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- 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- 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 -9- 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. 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- 27 accumulated, accrued, and unpaid dividends to the date fixed for redemption:
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 ---------- - ------------ ----------- ------------ 1997 $26.00 2000 $25.40 1998 25.80 2001 25.20 1999 25.60 2002 and 25.00 thereafter
(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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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 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. 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- 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 -3- 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. -4- 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 -5- 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 -6- 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 -7- 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). -8- 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 -9- 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 -10- 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 -11- 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 -12- EX-10.A 3 EXHIBIT 10(A) 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 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 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 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 4 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 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 5 6 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 6 7 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. 7 8 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 8 EX-10.B 4 EXHIBIT 10(B) 1 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 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 2 3 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. 3 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 4 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 5 6 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 6 7 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. 7 8 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 8 EX-10.C 5 EXHIBIT 10(C) 1 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 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 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" 2 3 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 3 4 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 4 5 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. 5 6 (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 6 7 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. 7 8 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 - --------------------------- --------------------------------- Secretary By: Gary G. Clark Its: Chairman Executive /s/ James J. Little --------------------------------- James J. Little, Executive Vice President and Chief Financial Officer 8 EX-10.D 6 EXHIBIT 10(D) 1 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 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 -2- 3 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 -3- 4 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- 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- 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- 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- 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- EX-13 7 EXHIBIT 13 1 Exhibit 13 Selected Consolidated FINANCIAL DATA
1996 1995 1994 1993 1992 Financial Condition data: - ------------------------- ---------------------------------------------------------------------------- (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 (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.
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. 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.
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 --------------------------------------------------------------------------------------------- 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% (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.
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.
1996 1995 1994 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 ====================================
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. 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.
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 - --------------------------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================================
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 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.
At December 31, 1996 1995 1994 (Dollars in Thousands) Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------ 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% - ------------------------------------------------------------------------------------------------------------------
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.
One Year Over 1 Over 3 Over 5 (Dollars in Thousands) or Less Through 3 Through 5 Years Total ------------------------------------------------------------------ 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% ================================================================== (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.
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 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. 9 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data) ASSETS December 31, 1996 1995 ---- ---- 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 =========== ===========
See accompanying notes to consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1995, and 1994 (Dollars in thousands, except per share data)
1996 1995 1994 ---- ---- ---- 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
See accompanying notes to consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 1996, 1995, and 1994 (Dollars in thousands, except per share data)
Preferred Stock ----- 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 ========
See accompanying notes to consolidated financial statements. 12 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized Gain Common Paid-In Retained Treasury (Loss) on Securities Stock Capital Earnings Stock Available for Sale Total ----- ------- -------- ----- ------------------ ----- 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 ======= ======= ======= ======= ======= =======
13 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995, and 1994 (Dollars in thousands)
1996 1995 1994 ---- ---- ---- 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
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. 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 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 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):
December 31, 1996 Amortized Gross Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- 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 ======= ======= ======= =======
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.
Amortized Fair Cost Value ---- ----- 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 ========== ======
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):
December 31, 1996 Amortized Gross Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- 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 ======== ======== ======== ========
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. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortized Fair Cost Value ---- ----- 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 ====== ======
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):
December 31, 1996 1995 ---- ---- 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 ========= =========
20 NOTES TO CONSOLIDATED FINANCIAL Loans held for sale as of December 31, 1996 and 1995 are as follows:
Amortized Gross Unrealized Estimated Cost Gains Losses Market Value ---- ----- ------ ------------ December 31, 1996 ----------------- 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 ====== ==== ===== ======
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. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) ALLOWANCE FOR LOSSES -------------------- Activity in the allowance for loan losses is summarized as follows (in thousands):
Year Ended December 31, 1996 1995 1994 ---- ---- ---- 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 ======= ======= =======
(9) PREMISES AND EQUIPMENT, NET --------------------------- Premises and equipment consist of the following (in thousands):
December 31, 1996 1995 ---- ---- 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 ======= =======
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):
December 31, 1996 1995 ---- ---- Loans $4,722 3,670 Mortgage-backed securities 972 1,907 Investment securities 375 707 ------ ------ $6,069 6,284 ====== ======
(11) DEPOSITS -------- Deposit balances by interest rate are summarized as follows (in thousands):
December 31, 1996 1995 ---- ---- Deposit Type Amount % Amount % ------------ ------ - ------ - 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% ======== ===== ======== =====
The weighted average interest rate on deposits was 4.63 percent and 4.60 percent at December 31, 1996 and 1995, respectively. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The contract maturity periods of certificates of deposit are as follows (in thousands):
December 31, Remaining 1996 1995 Term to Maturity Amount % Amount % ---------------- ------ - ------ - 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% -------- ----- ------- -----
Interest expense, aggregated by deposit category, was as follows (in thousands):
Year Ended December 31, 1996 1995 1994 ---- ---- ---- 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 ========= ====== ======
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):
December 31, Maturity Interest Rate 1996 1995 -------- ------------- ---- ---- 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 ========= =======
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. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) OTHER BORROWINGS ----------------
December 31, (In Thousands) 1996 1995 ---- ---- Reverse repurchase agreements secured by mortgage-backed securities $20,402 $24,654 Other notes payable 5,215 - ------- ------- Total other borrowings $25,617 $24,654 ======= =======
Following is a summary of securities sold under agreements to repurchase (in thousands):
December 31, 1996 1995 ---- ---- 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%
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. 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):
Tier 1 Total Core/ Risk- Risk- Tangible Leverage Based Based Capital Capital Capital Capital ------- ------- ------- ------- 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%
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tier 1 Total Core/ Risk- Risk- Tangible Leverage Based Based Capital Capital Capital Capital ------- ------- ------- ------- 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%
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. 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:
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 --------- -------- --------- -------- --------- -------- 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 ------- ------- -------
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the status of the options outstanding at December 31, 1996:
Weighted Weighted Average Range of Average Remaining Date Options Exercise Expiration Exercise Contractual Exercisable Outstanding Price Date Price Life ----------- ----------- ----- ---- ----- ---- 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
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.
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 --------- ---------------- --------- ----------------- ---------- ---------------- 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 ====== ====== ======
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):
1996 1995 As Pro As Pro Reported Forma Reported Forma -------- ----- -------- ----- 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
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): 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 1995 ---- ---- 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) ====== =====
Net periodic pension expense included the following components (in thousands):
Year Ended December 31, 1996 1995 1994 ---- ---- ---- 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 ===== ==== ====
Significant assumptions used in determining Pension Plan obligations and net periodic pension expense are as follows:
Year Ended December 31, 1996 1995 1994 ---- ---- ---- 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
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):
December 31, 1996 1995 1994 ---- ---- ---- 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 ====== ===== =====
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):
Year Ended December 31, 1996 1995 1994 ---- ---- ---- % of % of % of Pretax Pretax Pretax Amount Earnings Amount Earnings Amount Earnings ------ -------- ------ -------- ------ -------- 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% ======= ======= ===== ==== ===== ====
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):
December 31, 1996 1995 ---- ---- 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 ====== ======
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. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying value and estimated fair value of the Corporation's financial instruments are as follows (in thousands):
December 31, 1996 1995 ---- ---- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- 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) ========== ========== ========== ==========
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. 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) ---------------------------------------------
Year Ended December 31, 1996 (Dollars in thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- 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
Year Ended December 31, 1995 First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- 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
(21) Parent Company -------------- Condensed financial information of FirstFederal Financial Services Corp (parent company only) is as follows (dollars in thousands):
December 31, Condensed Statements of Financial Condition 1996 1995 ---- ---- 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 ======= =======
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, Condensed Statements of Operations 1996 1995 1994 ---- ---- ---- 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 ======== ======== ========
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 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
[PHOTO] [PHOTO] [PHOTO] 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
36 Corporate and Shareholder Information 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
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:
Common Stock Preferred Stock Series A Preferred Stock Series B - ------------------------------------------------------------------------------------------------------------------- High Low Dividend High Low Dividend High Low Dividend - ------------------------------------------------------------------------------------------------------------------- 1995 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 - -------------------------------------------------------------------------------------------------------------------
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. EX-21 8 EXHIBIT 21 1 Exhibit 21 SUBSIDIARIES OF REGISTRANT
Date and Percent of Voting Shares, Year and Partnership Interests, State Voting Trust Certificates, Name and Address Incorporated Capital Contributions Description of Activity - --------------------------- ------------ --------------------- ------------------------- 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 (1) Subsidiaries of First Federal Savings and Loan Association of Wooster, subsidiary of the Registrant.
EX-23.1 9 EXHIBIT 23.1 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 EX-23.2 10 EXHIBIT 23.2 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 EX-27 11 EXHIBIT 27
9 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. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 26,012,000 9,000,000 0 0 141,548,000 84,984,000 83,958,000 756,768,000 2,916,000 1,080,383,000 671,918,000 0 10,765,000 312,413,000 4,053,000 22,693,000 0 58,541,000 1,080,383,000 56,274,000 17,285,000 0 73,559,000 29,143,000 48,048,000 25,511,000 360,000 397,000 27,346,000 15,734,000 9,850,000 0 0 9,850,000 2.28 1.78 2.53 3,590,000 0 340,000 0 2,994,000 454,000 16,000 2,916,000 2,916,000 0 0
EX-99 12 EXHIBIT 99 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 -----END PRIVACY-ENHANCED MESSAGE-----