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
<FN>
(1) All per common share amounts have been restated to reflect stock dividends
and stock splits.
(2) Determined pursuant to the then applicable regulatory requirements.
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%
<FN>
(1) Average balances include non-accrual loans and interest income includes
loan fee amortization of $188,000, $301,000 and $498,000 for the years
ended December 31, 1996, 1995 and 1994, respectively
(2) Net interest income dividend by the average balance of interest-earning
assets.
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%
==================================================================
<FN>
(1) Includes scheduled loan amortizations as well as anticipated prepayments
based upon the interest rates of the assets and/or liabilities.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
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.