UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly period Ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transaction 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 of Incorporation) (I.R.S. Employer Identification No.)
135 East Liberty Street, Wooster, Ohio 44691
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 264-8001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1.00 par value 3,617,056
- ----------------------------- -------------------------------------
(Class) (Shares Outstanding at July 31, 1996)
The purpose of this amendment on Form 10-Q/A to the Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996 (the "Form 10-Q") of
FirstFederal Financial Services Corp is to revise the Financial Data Schedule
filed as Exhibit 27 to the Form 10-Q, to provide an Exhibit Index which was not
included in the Form 10-Q and to correct certain typographical errors contained
in the Form 10-Q.
FirstFederal Financial Services Corp
Table of Contents
- ------------------------------------------------------------------------------
Part I. Financial Information
Page
----
Consolidated Statements of Financial Condition as of June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the Three Months and Six Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15
Part II. Other Information 16
Signatures 17
Exhibit 18
-------------------------------------------------------------------------------------------------------
2
Part I. Financial Information
- ------------------------------
FIRSTFEDERAL FINANCIAL SERVICES CORP
and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
June 30, December 31,
1996 1995(1)
Assets (unaudited)
- ------ ----------- ------------
Cash on hand and in other financial institutions $ 24,093 $18,621
Interest-bearing deposits in other financial institutions 14,967 8,862
-------- -------
Total cash and cash equivalents 39,060 27,483
Investment securities:
Available for sale (Amortized cost of $27,905 and $41,720,
respectively) 27,509 41,953
Held to maturity (Fair value of $6,239 and $3,737, respectively) 6,357 3,795
Mortgage-backed securities:
Available for sale (Amortized cost of $107,862 and $174,981,
respectively) 105,396 174,974
Held to maturity (Fair value of $83,328 and $85,847,
respectively) 85,743 86,147
Loans held for sale 12,798 36,664
First Mortgage and other loans, net 710,998 544,396
Accrued interest receivable 6,114 6,284
Stock in Federal Home Loan Bank of Cincinnati, at cost 14,669 14,172
Premises and equipment, net 9,014 7,442
Cost in excess of fair value of net assets acquired 11,250 2,575
Other assets 15,700 1,385
---------- --------
$1,044,608 $947,270
========== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits $630,980 $574,041
Advances from the Federal Home Loan Bank and other borrowings 318,264 286,726
Advance payments by borrowers for taxes and insurance 3,201 3,714
Accrued expenses and other liabilities 9,325 6,256
------- -------
Total Liabilities 961,770 870,737
------- -------
Shareholders' Equity:
Serial preferred stock, no par value:
authorized 1,500,000 shares; Series A, 518,747 and 538,847
shares issued and outstanding, respectively, Series B, 486,600
and 496,500 shares issued and outstanding, respectively 23,362 24,132
Common stock, $1.00 par value; authorized 20,000,000 shares;
issued and outstanding 4,052,757 and 3,405,176 shares,
respectively 4,053 3,405
Paid-in capital 29,581 16,310
Retained earnings 30,562 35,338
Treasury stock, at cost (468,928 and 430,801 shares, respectively) (2,865) (2,799)
Unrealized gain (loss) on securities available for sale (1,855) 147
---------- --------
82,838 76,533
---------- --------
$1,044,608 $947,270
========== ========
(1) Derived from audited financial statements at December 31, 1995.
See accompanying notes to consolidated financial statements.
3
FirstFederal Financial Services Corp
and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
___________________ _________________
1996 1995 1996 1995
_______ _______ ________ _______
Interest and dividend income:
Loans $ 13,529 $10,409 $25,624 $20,300
Mortgage-backed securities 3,456 4,535 7,614 9,151
Investment securities and
other interest income 732 892 1,503 1,513
Dividends on stock in Federal
Home Loan Bank of Cincinnati 250 221 497 429
________ _______ _______ _______
Total interest & dividend income 17,967 16,057 35,238 31,393
________ ________ ______ _______
Interest expense:
Deposits 7,178 5,841 13,996 11,178
Borrowings 4,295 4,183 8,502 8,106
_______ _______ _______ _______
Total interest expense 11,473 10,024 22,498 19,284
Net interest income 6,494 6,033 12,740 12,109
Provision for losses on loans 90 --- 180 ---
______ ______ ______ ______
Net interest income after provision 6,404 6,033 12,560 12,109
______ ______ _______ ______
Other income:
Net gains on sales of loans 406 363 839 477
Net gains on sales of investments
and mortgage-backed securities 52 34 327 138
Manufactured housing brokerage fees,
net 3,264 --- 3,264 ---
Other operating income 1,585 531 2,436 1,040
______ _____ ______ _______
Total other income 5,307 928 6,866 1,655
______ _____ _____ _______
Operating expenses:
Compensation and related benefits 2,801 1,332 4,365 2,730
Premises & equipment 469 417 917 828
Federal insurance premium 347 288 661 577
Professional and other fees 373 213 602 399
State taxes 254 236 550 469
Other operating expenses 2,143 825 3,117 1,501
______ _____ ______ _______
Total operating expenses 6,387 3,311 10,212 6,504
Earnings before Federal income taxes 5,324 3,650 9,214 7,260
Federal income taxes 1,973 1,249 3,311 2,507
______ ______ ______ ______
Net earnings $3,351 $2,401 $5,903 $4,753
====== ====== ====== ======
Net earnings applicable to common
stock $2,921 $1,947 $5,038 $3,844
====== ====== ====== ======
Net earnings per common share (Note 3)
Primary $ .80 $ .59 $ 1.45 $ 1.16
Fully diluted $ .60 $ .45 $ 1.09 $ .89
Weighted average number of shares
outstanding:
Primary 3,629,469 3,291,798 3,477,334 3,297,226
Fully diluted 5,561,633 5,346,169 5,423,824 5,355,158
See accompanying notes to consolidated financial statements.
4
FirstFederal Financial Services Corp
and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
________________
1996 1995
_______ ______
Cash flows from operating activities:
Net earnings $ 5,903 $ 4,753
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Provisions for losses on loans 180 ---
Net gains from sales (1,166) (615)
Accretion of discounts, amortization of
premiums and depreciation, net 795 560
Proceeds from sale of loans held for sale 42,193 30,363
Disbursements for loans held for sale (23,866) (36,232)
Other (17,679) 1,284)
_________ _______
Net cash provided by operating activities 6,360 (2,455)
_________ ______
Cash flows from investing activities:
Loans originated (267,388) (85,791)
Principal repayments of mortgage and other loans 107,331 46,749
Proceeds from:
Mortgage-backed securities repayments and sales
Available for sale 91,176 16,978
Held to maturity 7,349 6,728
Investment securities repayments and sales
Available for sale 31,958 5,945
Held to maturity 174 119
Assets acquired in settlement of loan sales 267 33
Purchases of:
Mortgage-backed securities
Available for sale (23,952) (5,454)
Held to maturity (6,945) (8,612)
Investment securities
Available for sale (17,943) (22,000)
Held to maturity (2,693) (60)
Net cash received in acquisitions 24,606 ---
Purchase of premises and equipment, net (1,211) (284)
_________ _______
Net cash used by investing activities (57,271) (45,649)
_________ _______
Cash flows from financing activities:
Net increase in deposits 30,512 23,777
Proceeds from Federal Home Loan Bank advances 141,000 98,700
Repayments on Federal Home Loan Bank advances (127,897) (82,426)
Net proceeds from securities sold under agreement
to repurchase 16,982 12,494
Net decrease in advance payments by borrowers for
taxes and insurance (513) (761)
Repurchase of common and preferred stock (1,682) (1,300)
Proceeds from common stock transactions 5,746 41
Payment of cash dividends (1,660) (1,600)
_______ _______
Net cash provided by financing activities 62,488 48,925
________ _______
Net increase in cash & cash equivalents 11,577 821
Cash and cash equivalents at beginning of year 27,483 10,951
_______ _______
Cash and cash equivalents at end of period $39,060 $11,772
======= =======
See accompanying notes to consolidated financial statements.
5
FirstFederal Financial Services Corp
and Subsidiaries
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principals for
interim financial information and the instructions to Form 10-Q. It is
assumed that the readers of these interim financial statements have read or
have access to the 1995 Annual Report of FirstFederal Financial Services
Corp ("FirstFederal" of the "Company"). Therefore, only material changes
in financial condition and results of operations are discussed in
Management's Discussion and Analysis. The interim consolidated financial
statements include the accounts of FirstFederal, its subsidiaries, Mobile
Consultants, Inc. (MCi) and First Federal Savings and Loan Association of
Wooster (the "Association") and the Association's subsidiaries.
In the opinion of management, the condensed Consolidated Financial
Statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial condition of
FirstFederal as of June 30, 1996 and December 31, 1995, and the results of
its operations for the three and six months ended June 30, 1996 and 1995,
and its cash flows for the six months ended June 30, 1996 and 1995. The
results of operations for the interim period reported herein are not
necessarily indicative of results of operations to be expected for the
entire year. Financial statement reclassification have been made for 1995
to conform to classifications used in 1996.
(2) Commitments
At June 30, 1996, the Association had outstanding commitments to
originate mortgage loans aggregating approximately $22.4 million and
outstanding commitments to sell mortgage loans of $2.6 million. There were
no outstanding commitments to purchase or sell mortgage-backed securities
or investment securities at June 30, 1996.
(3) Earnings Per Share of Common Stock
Primary earnings per share were computed based on the weighted average
number of common shares and common stock equivalent shares outstanding
during the period, after giving effect to the reduction of earnings by the
dividend paid on the cumulative serial preferred stock. Exercisable stock
options are included as common share equivalents. The fully diluted
earnings per share assume the conversion of the Series A and Series B
cumulative serial preferred stock. Per share information has been adjusted
to reflect the 10% common stock dividends granted to the shareholders of
record on May 2, 1995 and 1996. All share and per share data presented
herein have been restated for the effect of the stock dividend in 1995 and
1996.
6
FirstFederal Financial Services Corp
and Subsidiaries
Notes to Consolidated Financial Statements
(4) Cash Dividends on Common and Preferred Stock
On April 17, 1996, the Board of Directors declared cash dividends for
the common stock and Series A and Series B Preferred Stock. The $.12 per
common share dividend was paid on May 22, 1996 to shareholders of record as
of May 2, 1996. The Series A preferred dividend of $.4375 per share was
paid on June 3, 1996 to shareholders of record as of May 10, 1996 and the
Series B preferred dividend of $.40625 per share was also paid on June 3,
1996 to shareholders of record as of May 10, 1996.
(5) Recently Issued Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 122 "Accounting
for Mortgage Servicing Rights", issued May, 1995, amended Financial
Accounting Standards Board Statement 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 the statement, when the Company sells or securitizes
loans and retains the mortgage servicing rights, it is required to allocate
the total cost of the mortgage loans to the mortgage servicing rights and
the loans (without the mortgage servicing rights) based on their relative
fair values. Any cost allocated to mortgage servicing rights is recognized
as a separate asset. The Company adopted this statement effective January
1, 1996. The impact of this statement on the financial statements has been
immaterial. The Company is recognizing approximately 1% of the loan
principal balances sold as mortgage servicing right assets, and a
corresponding increase in gains on sales of loans, although there can be no
assurances this amount will continue.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation", which was effective for
the Company beginning January 1, 1996. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation costs to be measured based
on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation costs based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25
to its stock based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
(6) Acquisitions
On March 23, 1996, the Association acquired a branch in Mt. Vernon,
Ohio from Peoples National Bank, Wooster, Ohio. The Association assumed
deposit liabilities of $26.6 million and acquired fixed assets, deposit
loans and cash. The purchase of the branch was accounted for by the
purchase method and, 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 of $2.4 million,
which will be amortized by the straight-line method over ten years. The
former Peoples branch has been closed and the deposits transferred to the
existing Mt. Vernon branch on South Main Street.
7
FirstFederal Financial Services Corp
and Subsidiaries
Notes to Consolidated Financial Statements
On April 3, 1996, the Company acquired Mobile Consultants, Inc.
("MCi") of Alliance, Ohio, an originator and servicer of manufactured home
loans for other financial institutions. MCi originates primarily non-mortgage,
consumer loan contracts through dealers of manufactured homes
located in 22 eastern and midwest states. MCi also services the collection
and recovery of troubled loans for the financial institutions who originate
the loans. The Company acquired $7.1 million in assets composed primarily
of advances receivable on manufactured home loans and furniture and
fixtures. The Company also assumed the liabilities of MCi, which comprise
mainly of accounts payable to dealers and lines of credit. The purchase
price of $10.6 million was comprised $1 million in cash, $4 million in
notes due quarterly during 1997, and the issuance of 307,386 shares of
common stock valued at $5.6 million. The purchase method of accounting was
used and, 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 of $9.6 million, which will be
amortized by the straight-line method at no longer than 10 years.
MCi contributed approximately $1.2 million to the second quarters net
earnings. The earnings and expenses were consolidated into the financials
for the quarter and will become a significant part of future operations.
8
FirstFederal Financial Services Corp
and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
The Company had net earnings of $3.4 million, or $.80 per common
share, and $5.9 million, or $1.45 per common share, for the three and six
month periods ended June 30, 1996, respectively. This compares very
favorably to net earnings of $2.4 million, or $.59 per common share, and
$4.8 million, or $1.16 per common share, for common share, for the three
and six months ended June 30, 1995, respectively. The increase in net
earnings of $1.0 million, or 40%, and $1.2 million, or 24%, for the three
and six month periods in 1996 from the same periods in 1995 is primarily
attributable to the income from MCi for the origination of manufactured
housing loans and other retail deposit fees partially offset by increased
operating expenses.
The annualized return on average assets for the three and six month
periods ended June 30,1996 was 1.33% and 1.21%, respectively, as compared
to 1.11% for both the three and six month periods in 1995. The amortized
return on shareholder's equity for the three and six month periods ended
June 30, 1996 was 16.79% and 15.00%, respectively, as compared to 13.19%
and 13.27% for the same periods in 1995.
FirstFederal's net earnings are primarily dependent upon the
difference between interest earned on interest-earning assets and interest
paid on interest-bearing liabilities. Net interest income depends upon the
volume of interest-earning assets and interest-bearing liabilities and the
interest rate earned or paid, respectively. Net earnings are also affected
by Company's non-interest income, which now includes manufactured housing
brokerage fees from MCi, by its non-interest expenses.
9
The following table presents for the periods indicated the average
interest-earnings assets and the average yields, the average interest-bearing
liabilities and average rates and the interest rate margin. All average
balances are daily average balances.
Three Months Ended
June 30,
--------------------------------------
1996 1995
---------------------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Rate1 Balance Rate1
----------- ------ ----------- ------
(Dollars in Thousands)
Net interest income $ 6,494 $ 6,033
======== ========
Interest-earning assets:
Mortgage loans $683,183 7.92% $508,398 8.19%
Mortgage-backed securities 223,484 6.19 273,661 6.63
Investments 53,942 7.28 60,625 7.34
-------- ---- -------- ----
Total average interest-earning
assets 960,609 7.48 842,684 7.62
-------- ---- -------- ----
Interest-bearing liabilities:
Savings 619,830 4.63 511,568 4.58
Borrowings 297,337 5.77 278,052 6.03
-------- ----- -------- ----
Total average interest-bearing
liabilities 917,197 5.00 789,620 5.09
-------- ----- -------- ----
Average interest-free funds $ 43,412 $ 53,064
======== ========
Interest rate spread 2.48 2.53
Impact of interest-free funds .22 .33
---- ----
Interest rate margin 2 2.70% 2.86%
==== =====
__________________
1 Annualized
2 Net interest income divided by average interest-earning assets.
Six Months Ended
June 30,
--------------------------------------
1996 1995
---------------------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Rate1 Balance Rate1
----------- ------ ----------- ------
(Dollars in Thousands)
Net interest income $12,740 $12,109
======= =======
Interest-earning assets:
Mortgage loans $642,340 7.98% $498,556 8.14%
Mortgage-backed securities 241,774 6.30 277,957 6.58
Investments 56,206 7.12 54,493 7.13
-------- ---- -------- ----
Total average interest-earning
assets 940,410 7.49 831,006 7.56
-------- ---- ------- ----
Interest-bearing liabilities:
Savings 600,460 4.66 506,832 4.45
Borrowings 293,422 5.80 273,297 5.98
-------- ---- ------- ----
Total average interest-bearing
liabilities 893,882 5.03 780,129 4.98
-------- ---- ------- ----
Average interest-free funds $ 46,528 $ 50,877
======== ========
Interest rate spread 2.46 2.58
Impact of interest-free funds .25 .24
---- ----
Interest rate margin 2 2.71% 2.82%
===== =====
- -------------------
1 Annualized
2 Net interest income divided by average interest-earning assets.
10
Net interest income increased by $461,000, or 7.6% from $6.0 million
for the second quarter of 1995 to $6.5 million for the second quarter of
1996. Net interest income increased due to an increase in average
interest-earning assets of 14.0%, offset partially by a 16.2% increase in
average interest-bearing liabilities and a declining interest rate margin
to 2.70% for the quarter ended June 30, 1996 from 2.86% for the quarter
ended June 30, 1995. The principal source of this growth in average
interest-earning assets was an increase in originations of mortgage and
consumer loans which was funded by increases in deposit liabilities and
borrowings. The net interest rate margin declined for the quarter because
of the rise in interest rates during the first half of 1996. This increase
in market interest rates had the effect of increasing the average cost of
deposits faster than the average interest rates earned on the Company's
assets.
Total interest and dividend income was $18.0 million for the three
months ended June 30, 1996, an increase of $1.9 million, or 11.9%, from
$16.1 million for the same period in 1995. This increase resulted
primarily from an increase of $117.9 million in the average balance of
interest-earning assets, partially offset by a 14 basis point decrease in
the weighted average yield on interest-bearing assets.
Interest expense was $11.5 million for the three months ended June 30,
1996, an increase of $1.4 million, or 14.5%, from the $10.0 million for the
three months ended June 30, 1995. This increase was due to an increase in
average interest-bearing liabilities of $127.6 million for the period
partially offset by a decrease in the average cost of funds from 5.09% at
June 30, 1995 to 5.00% at June 30, 1996. This nine basis point decrease in
cost of funds was primarily due to the repricing of borrowings, during the
quarter, to lower rates.
A provision of $90,000 was recorded for losses on loans for the second
quarter of 1996 as compared with no provision for the same period in 1995.
The provision was due primarily to a continuing increase in consumer loan
originations which inherently have a higher risk level. Originations of
consumer loans were $43 million for the second quarter of 1996 as compared
to $14 million for the second quarter of 1995. The provision for 1996
reflects the Company's evaluation of the loan portfolio and the increased
emphasis on consumer loan originations. The reserves for loan losses are
analyzed on an ongoing basis and the adequacy of the reserves are
determined by a detailed review of problem loans and real estate owned as
well as the historical trends in the losses on the various types of loans.
See "Non-Performing Assets and Loan Loss Reserves" for further information
on the provisions and analysis of loan loss reserves.
Total non-interest income was $5.3 million for the three months ended
June 30, 1996, up 471.9% from the $928,000 for the same period in 1995.
This increase was due primarily to a $3.3 million increase in manufactured
housing brokerage fees and a $1.0 million increase in retail banking fees.
On April 3, 1996 the Company completed its acquisition of MCi. (See
footnote 6 to the financial statements.) The $3.3 million in manufactured
housing brokerage fees represents the commissions earned by MCi in
brokered of loans to financial institutions. During the quarter MCi
brokered $79.4 million in manufactured housing contracts to financial
institutions which represents a 464% increase over the $17.1 million
brokered during the comparable period of 1995. This increase was due
partially to MCi's geographic expansion in late 1995, and partially to a
stronger market for manufactured homes. The increase in retail deposit
fees for the first quarter was primarily due to the growth in new checking
accounts as a result of a new marketing program initiated by the
Association during June 1995 to increase the percentage of deposits that
are considered core deposits.
11
Total operating expenses during the three months ended June 30, 1996
were $6.4 million as compared to $3.3 million for the same period in 1995,
an increase of $4.4 million, or 92.9%. The increase in total operating
expenses was due primarily to the addition of MCi's operating expenses.
MCi had operating expenses, comprised primarily of compensation and related
benefits, professional fees, and other operating expenses of $2.0 million.
The remaining increase in total operating expense was due primarily to
increases in compensation and benefits, premises and equipment, state taxes
and other operating expenses.
The increase in compensation and benefits for the second quarter of
1996 over 1995 was due to the addition of new employees for a new branch
which opened in Orrville during the first quarter of 1996, and the addition
of new employees to start up a commercial lending division within the
Company. Premises and equipment expenses increased also primarily because
of the new branch opening in Orrville. The increase in state taxes is
primarily due to an increase in the equity of the Company as the state tax
is basically a fixed percentage of that equity. Other expenses increased
primarily due to marketing and advertising costs associated with the new
high performance checking marketing campaign and also due to increased loan
origination expenses as a result of an increase in the volume of loans
closed during the second quarter of 1996. Overall the Company's operating
expenses to average assets ratio was 2.54% for the second quarter of 1996
as compared to 1.53% for the same period in 1995. Excluding the effects of
the addition of MCi, the operating expenses to average assets ratio for the
second quarter of 1996 would have been 1.72%. The addition of MCi's
earnings and operating expenses, combined with a relatively small addition
of assets and liabilities, results in a significant change in the Company's
financial ratios, including its ratio of operating expenses to average
total assets. As such, a more appropriate measure of the Company's
efficiency is the ratio of operating expenses, less non-interest income, to
net interest income. This ratio is known as the overhead ratio. The
Company's overhead ratio for the second quarter of 1996 was 16.63% as
compared to 39.50% for the same period of 1995.
Income tax expense increased by $724,000, or 58.0%, for the three
months ended June 30, 1996 in comparison to the same period in 1995. The
increase was a result of the 45.9% increase in pre-tax earnings. The
effective income tax rate from approximately 34% in 1995 to approximately
37% for 1996 was due primarily to the non-deductibility of the goodwill
from the MCi acquisition.
Asset/Liability Management
- --------------------------
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 primary measure of the Company's
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. The one year interest rate
sensitivity gap as a percentage of total assets was a negative 19.3% at
June 30, 1996 as compared to a positive 2.8% at December 31, 1995. The
increase in the interest-rate sensitivity gap is due to the lag in
repricing of interest-earning assets as compared to the repricing of the
interest-bearing liabilities plus the origination of an increased share of
fixed rate loans during the quarter which were funded by shorter-term
deposits.
In managing its interest-rate sensitivity gap position, FirstFederal
emphasizes the origination and retention of adjustable-rate mortgage loans
and mortgage-backed securities, consumer loans and home equity loans and 10
and 15 year fixed-rate mortgage loans. FirstFederal also attempts to
maintain a large base of core deposits, emphasizes certificate of deposit
accounts with maturities of two years or greater and utilizes longer-term
Federal Home Loan Bank ("FHLB") advances to assist in managing interest
rate risk. The Company 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.
12
Financial Condition
- -------------------
Total assets of the Company increased by $97.3 million, or 10.3%, from
$947.3 million at December 31, 1995 to $1.0 billion at June 30, 1996. This
increase was primarily from an increase in total loans of $142.7 million
offset partially by a decline in mortgage-backed securities. This growth
was funded by a $56.9 million increase in deposit liabilities and a $31.5
million increase in borrowings.
First mortgage loans and loans held for sale increased $142.7 million,
or 24.6% to $723.8 million at June 30, 1996 from $581.1 million at December
31, 1995. The increase in the loan portfolio was due to increased loan
originations during the first six months of the year. Originations of both
mortgage and consumer loans were $291.5 million for the six months ended
June 30, 1996, an increase of $169.4 million, or 138.7%, over the $122.1
million in originations for the same period in 1995. The increase in
originations was due to lower mortgage interest rates during January and
February, increased originations of consumer loans and an increase in
residential mortgage originations from third party correspondents.
Mortgage-backed securities available for sale declined by $69.6
million, or 39.8%, for the six months ended June 30, 1996 due to the sale
of securities to partially fund the increase in loans.
Total deposits increased by $56.9 million, or 9.9%, to $631.0 million
at June 30,1 996 from $574.0 million at December 31, 1995. Of the $56.9
million increase, $26.6 million was from the assumption of deposit
liabilities from the purchase of the Peoples National Bank branch. The
other $30.3 million increase came from a new branch opened in Orrville,
increased core deposit accounts from the new checking account promotion and
other retail certificates of deposit.
Total advances from the Federal Home Loan Bank (the "FHLB") and other
borrowings increased by $31.5 million or 11.0% during the six months ended
June 30, 1996. The increase was due to the strong loan origination demand
during the six months ended June 30, 1996. Advances and other borrowings
may fluctuate significantly depending upon loan demand and the Company's
asset/liability strategy.
Shareholders' equity increased by $6.3 million, or 8.2%, from $76.5
million at December 31, 1995 to $82.8 million, or 8.2% of total assets, at
June 30, 1996. The increase in shareholders' equity was attributable to
the issuance of 307,386 shares of common stock, valued at $5.6 million, in
connection with the acquisition of MCi as well as to net earnings for the
six months ended June 30, 1996 of $5.9 million. These increases were
partially offset by the payment of dividends on, and by repurchases of,
both the common and preferred stocks of the Company. Also contributing to
a decline in equity was an additional unrealized loss on securities
available for sale at June 30, 1996.
Non-Performing Assets and Loan Loss Reserves
- --------------------------------------------
Management reviews delinquent loans on an ongoing basis in order to
determine the collectability of both interest and principal. The Company's
non-performing and restructured assets decreased by $677,000 to $1.2
million at June 30, 1996 from $1.9 million at December 31, 1995. The ratio
of non-performing and restructured assets to total assets was .12% at June
30, 1996 as compared to .20% at December 31, 1995. The decline reflects an
improving Ohio economy as well as continued attention paid to collections
and asset dispositions.
The table below sets forth the amounts and categories of risk elements
in FirstFederal's loan portfolio. Non-performing assets include non-accrual
loans, restructured loans and assets acquired in settlement of
loans. Loans are placed on non-accrual status when the collection of
principal or interest becomes doubtful. In addition, one-to-four family
residential mortgage loans and multifamily residential
13
and commercial real estate loans are placed on non-accrual status when the
loan becomes 90 days or more contractually delinquent. Restructured loans
are loans which have involved forgiving a portion of interest or principal
on loans made at a rate materially less than that of market rates.
06/30/96 03/31/96 12/31/95 09/30/95 06/30/95
-------- -------- -------- -------- --------
(Dollars in Thousands)
Total non-accruing loans $ 642 $1,107 $1,425 $1,083 $ 550
Assets acquired in
settlement of loans 231 90 99 17 90
Restructured loans 340 341 366 362 347
------ ------ ------ ------ ------
Total non-performing and
restructured assets $1,213 $1,538 $1,890 $1,462 $ 987
====== ====== ====== ====== ======
Total non-performing and
restructured assets as
a percentage of total
assets .12% .15% .20% .16% .11%
==== ==== ==== ==== ====
Management of FirstFederal continuously reviews the loan portfolio to
determine the adequacy of loan loss reserves. This review is based upon
management's assessment of the risks involved in the various types of
loans. As a result of this review, First Federal had set aside $2.8
million at June 30, 1996 in reserves to cover potential losses,
representing 232% of the total non-performing and restructured assets.
Based on current information, management believes that the allowance
for loan losses is adequate to absorb potential losses in the portfolio.
Future additions may be necessary, however, based upon changing economic
conditions, increased loan balances and the conditions of the underlying
collateral.
Liquidity and Capital Resources
- -------------------------------
The Association is required to maintain a minimum level of certain
liquid investments, as defined in the Office of Thrift Supervision (the
"OTS") regulations, of at least 5% of net withdrawable deposits. The
Association's liquidity ratio at June 30, 1996 was 8.5%, which was in
excess of the regulatory requirement, compared to 11.9% at December 31,
1995. The decline in the liquidity ratio was due principally to the use of
funds from investment securities that had matured or been sold to originate
mortgage and consumer loans.
The Association's primary sources of funds include loan and mortgage-
backed security repayments or sales, sales of loans, advances from the FHLB
of Cincinnati and deposit inflows. If the Association requires funds
beyond its ability to generate them internally, the Association has
additional borrowing capacity with the FHLB and collateral eligible for
reverse repurchase agreements. The Association uses particular sources of
funds based upon comparative costs and availability. The Association
anticipates that it has adequate liquidity and additional sources of funds
to meet all of its foreseeable commitments (see Note 2 of the notes to
consolidated financial statements).
At June 30, 1996, the Association exceeded all fully phased-in minimum
capital requirements established by the OTS. The management of the
Association is not aware of any proposed regulation or recommendation by
the OTS, which, if implemented, would have a material effect upon the
Association. The Association's capital ratios at June 30, 1996 are set
forth below.
OTS Requirement Association Ratio
--------------- -----------------
Tangible Capital 1.5% 6.28%
Leverage (Core) Capital 3.0% 6.28%
Risk-based Capital 8.0% 12.60%
14
Minimum capital requirements, as required by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), to determine
whether an institution is well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized became effective December 19, 1992. Well capitalized
institutions are defined as having core capital of at least 5%, core
capital to risk-weighted assets of at least 6% and risk-based capital of at
least 10%. The Association's ratios at June 30, 1996 were 6.28%, 12.11%
and 12.60%, respectively. As a result, the Association meets the capital
requirements of a well capitalized institution.
The Association's management believes that, under the current
regulations, the Association will continue to meet its capital requirements
in the coming year. Further changes to the capital regulations are
possible, however, which may affect the Association's financial position,
or encourage a change in asset size or mix. In particular, an interest-rate
risk component was incorporated into the risk-based capital framework,
however, the OTS has deferred the implementation of the regulation for an
indefinite period of time. Based on the Association's interest-rate risk
profile and the level of interest rates at June 30, 1996, as well as the
Association's level of risk-based capital, management believes that this
regulation will not affect the Association's compliance with its risk-based
capital requirements.
Proposed Regulatory Action Regarding Insurance Assessments
- ----------------------------------------------------------
The deposits of savings associations such as the Association are
presently insured by the Savings Association Insurance Fund (the "SAIF"),
which, along with the Bank Insurance Fund (the "BIF"), are the two
insurance funds administered by the FDIC. Financial institutions which are
members of the BIF are experiencing substantially lower deposit insurance
premiums because the BIF has achieved its required level of reserves while
the SAIF has not yet achieved its required reserves. A recapitalization
plan for the SAIF under consideration by Congress provides for a special
assessment estimated to be 0.80% to 0.90% of deposits to be imposed on all
SAIF insured institutions in order to enable the SAIF to achieve its
required level of reserves. If the proposed assessment of 0.80% to 0.90%
was effected based on deposits as of March 31, 1995 (as proposed), the
Association's special assessment would amount to approximately $3.0 million
after taxes. Accordingly, this special assessment would significantly
increase non-interest expense and adversely affect the Company's results of
operations. Conversely, depending upon the Association's capital level and
supervisory rating and assuming the insurance premium levels for BIF and
SAIF members are again equalized, future deposit insurance premiums are
expected to decrease significantly, to as low as a minimum annual premium
of $2,000 from the 0.23% of deposits currently paid by the Association,
which would reduce non-interest expense for future periods.
15
Part II. Other Information
- ------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Annual Meeting
--------------
The Annual Meeting of stockholders of the Company were held on
April 17, 1996 in order to consider the election of three
directors of the Company. In a vote cast 2,287,709 shares for,
0 shares against and 19,034 shares abstaining, Messrs. Gary G.
Clark, Steven N. Stein and Ronald A. James, Jr. were elected to
the Board of Directors of the Company with terms to expire in
1999. Continuing as Directors with terms to expire in 1998 are
Messrs. R. Victor Dix, Daniel H. Plumly and L. Dwight Douce.
Continuing with terms to expire in 1997 are Messrs. Richard E.
Hearld, Robert F. Belden, and Gust B. Geralis.
Item 5. Other Information
-----------------
Dividend
--------
On July 17, 1996, the Company announced a quarterly cash
dividend of $.12 per common share. The dividend will be payable
on August 22, 1996 to shareholders of record as of August 2,
1996.
In addition, the Board declared dividends of $.4375 per share on
the Cumulative Convertible, Series A, Preferred stock and
$.40625 per share on the Cumulative Convertible, Series B,
Preferred stock. these dividends will be paid on September 3,
1996 to shareholders of record as of August 12, 1996.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) No reports on 8-K have been filed during the quarterly
period covered by this report.
All other items have been omitted as not required and not applicable under
the instructions.
16
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FirstFederal
Financial Services Corp
-----------------------
(Registrant)
Date August 22, 1996 /s/ Gary G. Clark
-------------------- -------------------------------------
Gary G. Clark
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date August 22, 1996 /s/ James J. Little
-------------------- -------------------------------------
James J. Little
Executive Vice President
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule