1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-17894
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FIRSTFEDERAL FINANCIAL SERVICES CORP
(Exact name of registrant as specified in its charter)
Ohio 34-1622711
- -------------------------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
135 East Liberty Street, Wooster, Ohio 44691
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (330) 264-8001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1.00 par value 5,037,156
- ------------------------------ --------------------------------------
(Class) (Shares Outstanding at August 14, 1997)
This Form 10-Q contains 18 pages.
(No Exhibit Index)
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FIRSTFEDERAL FINANCIAL SERVICES CORP
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Consolidated Statements of Financial Condition as of June 30, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the Three Months and Six Months
Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial Condition and Results of
Operations 9-14
PART II. OTHER INFORMATION 15
Signatures 17
Exhibit 27 Financial Data Schedule 18
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3
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
JUNE 30,
1997 DECEMBER 31,
ASSETS (UNAUDITED) 1996 (1)
- ------ ----------- ------------
Cash on hand and in other financial institutions $ 18,798 $ 26,012
Interest-bearing deposits in other financial
institutions 717 9,000
----------- -----------
Total cash and cash equivalents 19,515 35,012
Investment securities:
Available for sale (Amortized cost of $72,927 and $47,865,
respectively) 72,811 47,763
Held to maturity (Fair value of $6,230 and $6,238, respectively) 6,222 6,247
Mortgage-backed securities:
Available for sale (Amortized cost of $156,678 and $95,445,
respectively) 155,165 93,785
Held to maturity (Fair value of $70,563 and $77,720,
respectively) 71,465 78,737
Retained interest 19,558 6,491
Loans held for sale 63,026 87,071
Loans receivable, net 724,176 669,697
Accrued interest receivable 6,734 6,069
Stock in Federal Home Loan Bank of Cincinnati, at cost 18,108 17,485
Premises and equipment, net 10,977 10,386
Cost in excess of fair value of net assets acquired 9,895 10,572
Other assets 25,497 11,068
----------- -----------
$ 1,203,149 $ 1,080,383
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits $ 663,955 $ 671,918
Advances from the Federal Home Loan Bank and
other borrowings 390,990 312,413
Advance payments by borrowers for taxes and insurance 1,351 1,937
Accrued expenses and other liabilities 15,271 8,828
Subordinated debt 40,500 --
----------- -----------
TOTAL LIABILITIES 1,112,067 995,096
----------- -----------
Shareholders' Equity:
Serial preferred stock, no par value:
authorized 1,500,000 shares; Series A, 492,636 and 498,287 shares issued
and outstanding, respectively, Series B, 429,892
and 479,327 shares issued and outstanding, respectively 21,363 22,693
Common stock, $1.00 par value; authorized 20,000,000
shares; issued and outstanding 5,065,672 and 4,053,194
shares, respectively 5,066 4,053
Paid-in capital 29,543 29,568
Retained earnings 38,284 32,796
Treasury stock, at cost (411,996 and 428,484 shares, respectively) (2,115) (2,677)
Securities equity valuation account (1,059) (1,146)
----------- -----------
91,082 85,287
----------- -----------
$ 1,203,149 $ 1,080,383
=========== ===========
<FN>
(1) Derived from audited financial statements at December 31, 1996.
See accompanying notes to consolidated financial statements.
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4
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME:
Loans $ 15,155 $ 13,529 $ 29,699 $ 25,624
Mortgage-backed securities 3,410 3,456 6,127 7,614
Investment securities and other interest income 1,427 732 2,562 1,503
Dividends on stock in Federal Home Loan Bank of Cincinnati 321 250 623 497
---------- ---------- ---------- ----------
TOTAL INTEREST & DIVIDEND INCOME 20,313 17,967 39,011 35,238
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 7,658 7,178 15,320 13,996
Borrowings 6,246 4,295 10,888 8,502
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 13,904 11,473 26,208 22,498
---------- ---------- ---------- ----------
NET INTEREST INCOME 6,409 6,494 12,803 12,740
Provision for losses on loans 170 90 277 180
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION 6,239 6,404 12,526 12,560
---------- ---------- ---------- ----------
OTHER INCOME:
Net gains on sales of loans 1,951 406 4,667 839
Net gains on sales of investments and mortgage-backed securities 74 52 74 327
Manufactured housing brokerage fees, net 1,597 3,264 2,236 3,264
Loan servicing income 1,200 750 2,400 750
Loan fees 345 172 652 264
Deposit charges 635 509 1,220 783
Other operating income 404 154 988 639
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 6,206 5,307 12,237 6,866
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Compensation and related benefits 3,353 2,801 6,688 4,365
Premises & equipment 586 469 1,159 917
Federal insurance premium 110 347 214 661
Professional and other fees 435 373 744 602
State taxes 264 254 616 550
Other operating expenses 2,211 2,143 4,206 3,117
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 6,959 6,387 13,627 10,212
---------- ---------- ---------- ----------
Earnings before Federal income taxes 5,486 5,324 11,136 9,214
Federal income taxes 1,790 1,973 3,875 3,311
---------- ---------- ---------- ----------
NET EARNINGS $ 3,696 $ 3,351 $ 7,261 $ 5,903
========== ========== ========== ==========
NET EARNINGS APPLICABLE TO COMMON STOCK $ 3,294 $ 2,921 $ 6,452 $ 5,038
========== ========== ========== ==========
NET EARNINGS PER COMMON SHARE (NOTE 3)
BASIC $ .70 $ .64 $ 1.37 $ 1.16
DILUTED $ .53 $ .48 $ 1.04 $ .87
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
BASIC 4,718,654 4,536,836 4,696,830 4,346,668
DILUTED 6,983,036 6,952,041 6,978,274 6,779,780
See accompanying notes to consolidated financial statements.
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5
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30 ,
-------------------------
1997 1996
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,261 $ 5,903
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provisions for losses on loans 277 180
Net gains from sales (4,741) (1,166)
Accretion of discounts, amortization of premiums and depreciation, net 836 795
Proceeds from sale of loans held for sale 141,303 42,193
Disbursements for loans held for sale (117,258) (23,866)
Other (8,895) (17,679)
--------- ---------
Net cash provided by operating activities 18,783 6,360
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated (165,648) (267,388)
Principal repayments of mortgage and other loans 115,454 107,331
Proceeds from:
Mortgage-backed securities repayments and sales
Available for sale 14,511 91,176
Held to maturity 6,684 7,349
Investment securities repayments and sales
Available for sale 44,083 31,958
Held to maturity 7,779 174
Assets acquired in settlement of loan sales, net (111) 267
Purchases of:
Mortgage-backed securities
Available for sale (51,501) (23,952)
Held to maturity (23,720) (6,945)
Investment securities
Available for sale (70,512) (17,943)
Held to maturity (6,025) (2,693)
Net cash received in acquisitions -- 24,606
Net change in retained interest (13,067) --
Purchase of premises and equipment, net (1,269) (1,211)
--------- ---------
Net cash used by investing activities (143,342) (57,271)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits (7,963) 30,512
Proceeds from Federal Home Loan Bank advances 58,821 141,000
Repayments on Federal Home Loan Bank advances (49,858) (127,897)
Net proceeds from other borrowings 110,114 16,982
Net decrease in advance payments by borrowers for taxes and insurance (586) (513)
Repurchase of common and preferred stock -- (1,682)
Proceeds from common stock transactions 308 5,746
Payment of cash dividends (1,774) (1,660)
--------- ---------
Net cash provided by financing activities 109,062 62,488
--------- ---------
Net increase in cash & cash equivalents (15,497) 11,577
Cash and cash equivalents at beginning of year 35,012 27,483
--------- ---------
Cash and cash equivalents at end of period $ 19,515 $ 39,060
========= =========
See accompanying notes to consolidated financial statements.
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6
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information and the instructions to Form 10-Q. It is assumed that the
readers of these interim financial statements have read or have access to the
1996 Annual Report of FirstFederal Financial Services Corp ("FirstFederal" or
the "Company"). Therefore, only material changes in financial condition and
results of operations are discussed in Management's Discussion and Analysis. The
interim consolidated financial statements include the accounts of FirstFederal,
its subsidiaries, Mobile Consultants, Inc. (MCi) and First Federal Savings and
Loan Association of Wooster (the "Association") and the Association's
subsidiaries. The Association changed its name on July 3, 1997 to Signal Bank,
N.A. upon completing its conversion to a national bank.
All significant intercompany transactions have been eliminated.
In the opinion of management, the Consolidated Financial Statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of FirstFederal as of June
30, 1997 and December 31, 1996, and the results of its operations for the six
months ended June 30, 1997 and 1996, and its cash flows for the six months ended
June 30, 1997 and 1996. The results of operations for the interim period
reported herein are not necessarily indicative of results of operations to be
expected for the entire year. Financial statement reclassifications have been
made for 1996 to conform to classifications used in 1997.
The Company, through its subsidiary bank, grants residential, commercial and
consumer loans to customers located primarily in Ohio and manufactured housing
loans to customers in 37 states. Residential mortgage, manufactured housing,
consumer and commercial loans comprise 73%, 9%, 12% and 6% of total loans
receivable at June 30, 1997.
(2) Commitments
At June 30, 1997, the Association had outstanding commitments to
originate loans aggregating approximately $119.7 million and outstanding
commitments to sell loans of $55.2 million. Commitments to sell mortgage-backed
securities were $1.7 million at June 30, 1997.
Collateral obtained related to the commitments is determined using management's
credit evaluation of the borrower and may include real estate, vehicles,
business assets, deposits and other items. In management's opinion, the
commitments represent normal banking transactions, and no material losses are
expected to result therefrom.
(3) Earnings Per Share of Common Stock
Primary earnings per share were computed based on the weighted average
number of common shares and common stock equivalent shares outstanding during
the period, after giving effect to the reduction of earnings by the dividend
paid on the Series A and Series B cumulative serial preferred stock. Exercisable
stock options are included as common share equivalents. The fully diluted
earnings per share assume the conversion of the Series A and Series B cumulative
serial preferred stock.
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7
On April 16, 1997, the Board of Directors declared a five-for-four stock split,
effected as a 25% stock dividend, granted to shareholders of record on May 2,
1997. All share and per share data presented herein have been restated for the
effect of the stock dividends in 1997 and 1996. The basic earnings per share
and diluted earnings per share for the three months ended June 30, 1997 were
$.70 and $.53, respectively.
(4) Cash Dividends on Common and Preferred Stock
In addition to the stock dividend, the Company paid a first quarter
quarterly cash dividend of $.11 per common share. The dividend was paid on May
22, 1997 to shareholders of record as of May 2, 1997 on post-split shares. The
Board also declared dividends of $ .4375 per share on the Cumulative
Convertible, Series A, Preferred stock and $.40625 per share on the Cumulative
Convertible, Series B, Preferred stock. These dividends were paid on June 2,
1997 to shareholders of record as of May 10, 1997.
(5) Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which
supersedes Accounting Principles Board (APB) No. 15, Earnings per Share, and
replaces the presentation of primary and fully diluted earnings per share with
basic and diluted earnings per share. SFAS No. 128 was issued to simplify the
computation of earnings per share and make the U. S. Standard more compatible
with the earnings per share standards of other countries and that of the
International Accounting Standards Committee (ISAC). SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. Earlier application is not permitted, however, pro forma
earnings per share is permitted for periods prior to required adoption. The
following table discloses pro forma EPS pursuant to SFAS No. 128 for the six
months ended June 30, 1997 and June 30, 1996.
Six months ended June 30
1997 1996
-------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS
Income available to
common stockholders $6,452 4,697 $1.37 $5,038 4,347 $1.16
Effect of Dilutive Securities
Stock options 15 0.01 63 0.01
Convertible Preferred Stock 2,266 0.32 2,370 0.28
Diluted EPS
Income available to
common stockholders 6,452 5,038
Convertible Preferred Dividends 809 865
------ ----- ----- ------ ----- -----
Net Earnings $7,261 6,978 $1.04 $5,903 6,780 $0.87
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(6) Acquisitions
On April 3, 1996, the Company acquired Mobile Consultants, Inc. ("MCi")
of Alliance, Ohio, an originator and servicer of manufactured housing finance
contracts for other financial institutions.
MCi contributed approximately $1.5 million to net earnings for the
quarter ended June 30, 1997, compared to $1.2 million for the quarter ended June
30, 1996. The earnings and expenses were consolidated into the financials and
will continue to be a significant part of future earnings.
On July 8, 1997, the Corporation completed the acquisition of the stock
of Summit Bancorp (Summit). Under the terms of the agreement, FirstFederal
exchanged 2.3375 shares, of its common stock for each of the 234,891 shares of
Summit stock. Based on the average of FirstFederal's closing bid and ask price
of $40.50 on July 8, 1997, the transaction value was approximately $24.4
million. The merger will be accounted for as a pooling of interests. Summit
Bancorp's subsidiary, Summit Bank, has two commercial banking offices located in
Summit County, Ohio. At June 30, 1997, Summit had total assets of $88.6 million,
deposits of $72.8 million, and shareholders equity of $6.0 million.
On July 1, 1997, the Corporation completed the acquisition of the stock
of Alliance Corporate Resources, Inc. ("ACR"). ACR originates lease financing of
information technology equipment and provides information technology management
consulting services. ACR does business in 42 states, through office locations in
Columbus, Ohio and Richmond, Virginia. ACR shareholders received a payment of $2
million for 100% of their shares and will participate in future ACR earnings for
five years. The acquisition will be accounted for under the purchase of stock
method. ACR originated $21 million in lease transactions for the year ended
December 31, 1996. At June 30, 1997, ACR had total assets of $22.8 million.
On May 19, 1997, the Association signed an agreement to acquire seven
branch offices of KeyBank, National Association, which have approximately $158
million in deposits and are located in the cities of Bucyrus, Crestline, Cygnet,
Galion, Tiffin, Wayne and Willard in north central and north western Ohio. The
purchase price is equal to 12.15% of average deposits measured just prior to
closing which will generate approximately $19 million in goodwill which will be
amortized over ten years.
(7) Subordinated Notes
On March 20, 1997, FirstFederal completed the private placement of
$40.5 million of 9.125% subordinated notes due March 15, 2004. The subordinated
notes qualify, pursuant to rules of the Federal Reserve System, as Tier II
capital. The subordinated notes are subject to redemption at the option of the
Company commencing March 15, 2002.
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9
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
The Company had net earnings of $3.7 million, or $0.70 per common
share, and $7.3 million, or $1.37 per common share, for the three and six month
periods ended June 30, 1997, respectively. This compares favorably to $2.9
million, or $0.64 per common share, and $5.9 million, or $1.16 per common share
for the respective three and six month periods ended June 30, 1996. The increase
in 1997 earnings is primarily the result of higher non-interest income,
partially offset by higher non-interest expenses. Of the Company's net earnings
of $3.7 million and $7.3 million for the three and six month periods ended June
30, 1997, $1.5 million and $3.0 million, respectively was contributed by MCi.
The annualized return on average assets ("ROA") for the three and six month
periods ended June 30, 1997 was 1.29% in both periods, as compared to 1.33% and
1.21% for the three and six month periods ended June 30, 1996, respectively. The
annualized return on shareholder's equity ("ROE") for the three and six month
periods ended June 30, 1997 were 16.52% and 16.49%, respectively as compared to
16.79% and 15.0% for the three and six month periods ended June 30, 1996,
respectively..
FirstFederal's net earnings are primarily dependent upon the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing liabilities. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rate
earned or paid, respectively. Net earnings are also affected by the Company's
non-interest income, which now includes manufactured housing brokerage fees from
MCi, and by its non-interest expenses.
When used in this Form 10-Q, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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The following table presents for the periods indicated the average
interest-earnings assets and the average yields, the average interest-bearing
liabilities and average rates and the interest rate margin. All average balances
are daily average balances.
Three Months Ended
June 30 ,
--------------------------------------------------
1997 1996
--------------------------------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Rate(1) Balance Rate(1)
------- ------- ------- -------
(Dollars in Thousands)
Net interest income $ 6,409 $ 6,494
========== ==========
Interest-earning assets:
Loans receivable $ 746,838 8.08% $ 683,183 7.92%
Mortgage-backed securities 221,625 6.15 223,484 6.19
Investments 104,272 6.98 53,942 7.28
---------- ---- ---------- ----
Total average interest-earning assets 1,072,735 7.57 960,609 7.48
---------- ---- ---------- ----
Interest-bearing liabilities:
Deposits 659,623 4.64 619,830 4.63
Subordinated debt 40,500 9.13 -- --
Other borrowings 355,311 5.99 297,337 5.77
---------- ---- ---------- ----
Total average interest-bearing liabilities 1,055,434 5.27 917,197 5.00
---------- ---- ---------- ----
Average interest-free funds $ 17,301 $ 43,412
========== ==========
Interest rate spread 2.30 2.48
Impact of interest-free funds .09 .22
---- ----
Interest rate margin(2) 2.39% 2.70%
==== ====
<FN>
- ----------
(1)Annualized
(2)Net interest income divided by average interest-earning assets.
Six Months Ended
June 30 ,
--------------------------------------------------
1997 1996
--------------------------------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Rate(1) Balance Rate(1)
------- ------- ------- -------
(Dollars in Thousands)
Net interest income $ 12,803 $ 12,740
========== ==========
Interest-earning assets:
Loans receivable $ 736,628 8.06% $ 642,430 7.98%
Mortgage-backed securities 196,352 6.24 241,774 6.30
Investments 96,747 6.58 56,206 7.12
---------- ---- ---------- ----
Total average interest-earning assets 1,029,727 7.58 940,410 7.49
---------- ---- ---------- ----
Interest-bearing liabilities:
Deposits 661,636 4.63 600,460 4.66
Subordinated debt 23,047 9.13 -- --
Other borrowings 327,671 5.83 293,422 5.80
---------- ---- ---------- ----
Total average interest-bearing liabilities 1,012,354 5.18 893,882 5.03
---------- ---- ---------- ----
Average interest-free funds $ 17,373 $ 46,528
========== ==========
Interest rate spread 2.40 2.46
Impact of interest-free funds .09 .25
---- ----
Interest rate margin(2) 2.49% 2.71%
==== ====
<FN>
- ----------
(1)Annualized
(2)Net interest income divided by average interest-earning assets.
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Net interest income decreased by $85,000 from $6.5 million in the second
quarter of 1996 to $6.4 million in the second quarter of 1997. This decrease was
primarily the result of an increase in funding costs offset by growth in average
interest-earning assets, particularly consumer and mortgage loans. The interest
rate margin decreased 31 basis points from 2.70% to 2.39% for the three months
ended June 30, 1996 and 1997 respectively. The decline in the margin is
attributed to a combination of the higher level of average interest-bearing
liabilities as well as increased rates paid on those liabilities.
Total interest and dividend income was $20.3 million for the three months
ended June 30, 1997, an increase of $2.3 million, or 13.1%, from $18 million for
the same period in 1996. This increase resulted primarily from an increase of
$112 million in the average balance of interest-earning assets reflecting a $64
million increase in loans receivable and a $50 million increase in investments.
Yields on average interest-earning assets increased 9 basis points in the second
quarter of 1997 compared to those in the second quarter of 1996, primarily due
to a favorable change in the mix of loans receivable to higher yielding assets.
Interest expense was $13.9 million for the three months ended June 30,
1997, an increase of $2.4 million, or 21.2%, from the $11.5 million for the
three months ended June 30 , 1996. This increase was due to growth in average
interest-bearing liabilities of $138.2 million compared to the second quarter of
1996, as well as an increase in the average cost of funds of 27 basis points
from 5.0% at June 30 , 1996 to 5.27% at June 30, 1997. This increase in cost of
funds was primarily due to increased rates paid on borrowings, particularly the
subordinated notes.
A provision of $170,000 was recorded for losses on loans for the second
quarter of 1997 as compared with a provision of $90,000 for the same period in
1996. The increased provision was due primarily to a continuing increase in
commercial and consumer loan originations which inherently have a higher risk
level than traditional 1-4 family mortgage loans. Originations of commercial and
consumer loans were $26.3 million and $91.2 million for the second quarter of
1997, respectively, as compared to $10.9 and $43.0 million, respectively, for
the second quarter of 1996. The primary component of the significant increase in
consumer loan originations is manufactured home loans, most of which are sold by
the Company through asset-backed securitizations. The reserves for loan losses
are analyzed on an ongoing basis and the adequacy of the reserves are determined
by a detailed review of problem loans and real estate owned as well as the
historical trends in the losses on the various types of loans. See
"Non-performing Assets and Loan Loss Reserves" for further information on the
provisions and analysis of loan loss reserves.
Total non-interest income was $6.2 million for the three months ended
June 30, 1997, up 17.0% from the $5.3 million for the same period in 1996, due
primarily to three components. First is the $1.6 million gain recognized from
the Company's third issuance of an asset-backed security ("ABS") of manufactured
housing contracts. The $50 million ABS was sold in a private placement which
closed in April of 1997. This gain was offset by a $1.7 million decrease in
manufactured housing brokerage fees as loan originations were apportioned to the
ABS as opposed to brokered to other financial institutions. The ongoing
servicing income associated with this ABS as well as increases in retail banking
fees and other charges make up the third component of the increase in
non-interest income.
Total operating expenses during the three months ended June 30, 1997 were
$7.0 million as compared to $6.4 million for the same period in 1996, an
increase of $0.6 million, or 9.4%. The increase in total operating expense was
due primarily to increases in compensation and benefits, premises and equipment,
state taxes and other operating expenses attributed to the Association's new
lines of business, such as commercial lending and expanded activities at MCi.
While non-interest expense continues to be negatively impacted by the
Company's efforts to reposition its balance sheet to a more community bank-like
structure, noninterest income growth has been greater than the growth in
noninterest expense. One measure of effectiveness in this area is the overhead
ratio, which is the ratio of operating expenses (not including goodwill
amortization) less total non-interest income to net interest income. This ratio
improved from 13.18% in the second quarter of 1996 to 6.85% in the second
quarter of 1997, and is indicative of the effectiveness of management's effort
to diversify the Company's earnings stream while controlling costs.
11
12
Income tax expense decreased by $183,000, or 9.3%, for the three months
ended June 30, 1997 in comparison to the same period in 1996. The decrease
reflects management efforts to lower the effective tax rate of the Company which
currently is 35% compared to 36% for the same period in 1996.
Asset/Liability Management
- --------------------------
The primary objective of interest rate risk management is to maintain a
balance between the stability of net interest income and the risks of changing
market interest rates. The primary measure of the Company's vulnerability to
changing interest rates is the interest-rate sensitivity gap, or the difference
between assets and liabilities scheduled to mature or reprice within a specific
period. The one year interest rate sensitivity gap as a percentage of total
assets was negative 8.2% at June 30, 1997 as compared to a positive 1.6% at
December 31, 1996.
In managing its interest-rate sensitivity gap position, FirstFederal
emphasizes the origination and retention of adjustable-rate mortgage loans and
mortgage-backed securities, consumer loans and home equity loans and 10 and 15
year fixed-rate mortgage loans. FirstFederal also attempts to maintain a large
base of core deposits, emphasizes certificate of deposit accounts with
maturities of two years or greater and utilizes longer-term Federal Home Loan
Bank ("FHLB") advances to assist in managing interest rate risk. The Company
strives to maintain a position of neutrality between the maturities of its
interest-earning assets and interest-bearing liabilities. This results in more
stabilized net interest margins in periods of either rising or falling interest
rates.
Financial Condition
- -------------------
Total assets of the Company increased by $122.8 million, or 11.4%,from
December 31, 1996 to June 30, 1997. The Company issued $40.5 million in 9.125%
subordinated debt in March 1997 which was used to pay down FHLB borrowings,
provide funds for loan originations and as a source of additional capital to
support future growth activities. Interest on the subordinated debt is payable
semiannually beginning in September of 1997, and the debt is redeemable at the
option of the Company at any time after June 30, 2002 until its maturity date of
June 30, 2004. In an effort to leverage the subordinated debt funds, the Company
engaged in a wholesale strategy whereby short duration mortgage-backed
securities are purchased using short duration borrowings at a positive spread.
This strategy will be unwound as retail assets and deposits are increased. As
previously discussed, the Company completed its third asset-backed
securitization (ABS) of manufactured housing finance contracts in the second
quarter of 1997. This securitization, coupled with the securitization completed
in the first quarter of 1997, generated the $13.1 million increase in retained
interest from $6.5 million at December 31, 1996 to $19.6 million as of June 30,
1997. Retained interest represents the present value of the excess interest
spread on manufactured housing loans sold through the ABSs. The value of the
retained interest can be impacted positively or negatively based upon the rate
of prepayments and credit losses incurred within the ABS. Management evaluates
the valuation of retained interest and reviews assumptions for prepayments and
credit losses within the ABSs on a quarterly basis. Future securitizations will
result in additional growth in retained interest.
Loans receivable and loans held for sale increased $30.4 million, or 4%
to $787.2 million at June 30, 1997 from $756.8 million at December 31, 1996. The
increase in the loan portfolio was due to originations of $58.0 million in
mortgage loans, $91.2 million in consumer loans (including $62.1 million in
manufactured housing originations) and $26.3 in commercial loans for the three
months ended June 30, 1997, partially offset by the securitization sale of $50
million in manufactured housing contracts. During the same period in 1996,
originations of mortgage, consumer and commercial loans totaled $118.2 million,
$43.0 million and $10.9 million respectively.
Mortgage-backed securities available for sale increased by $61.4 million,
or 65.4%, and investment securities available for sale increased by $25.0
million, or 52.4%, from December 31, 1996 to June 30, 1997. These increases
reflect the Company's efforts to leverage the subordinated debt funds as
previously discussed.
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Total deposits decreased by $8.0 million, or 1.2%, to $664.0 million at
June 30, 1997 from $671.9 million at December 31, 1996, reflecting normal
customer outflows.
Total advances from the Federal Home Loan Bank (the "FHLB") and other
borrowings increased by $119.1 million or 38.1% during the three months ended
June 30, 1997. This increase reflects the Company's efforts to leverage the
subordinated debt funds as previously discussed, as well as to fund loan growth.
Shareholders' equity increased by $5.8 million, or 6.8%, from $85.3
million at December 31, 1996 to $91.1 million, or 7.6% of total assets at June
30, 1997. The increase in shareholders' equity was attributable to net earnings
for the six months ended June 30, 1997, partially offset by the payment of
dividends on both the common and preferred stocks of the Company.
Non-Performing Assets and Loan Loss Reserves
- --------------------------------------------
Management reviews delinquent loans on an ongoing basis in order to
determine the collectibility of both interest and principal. The Company's
non-performing and restructured assets decreased by $575,000 to $3.6 million at
June 30, 1997 from $4.17 million at December 31, 1996. The ratio of
non-performing and restructured assets to total assets was .30% at June 30, 1997
as compared to .37% at December 31, 1996. On June 30, 1997 $2.1 million or 65.8%
of total non-performing and restructured assets are residential mortgage loans,
which traditionally have low loss ratios.
The table below sets forth the amounts and categories of risk elements in
FirstFederal's loan portfolio. Non-performing assets include non-accrual loans,
restructured loans and assets acquired in settlement of loans. Loans are placed
on non-accrual status when the collection of principal or interest becomes
doubtful. In addition, one-to-four family residential mortgage loans and
multifamily residential and commercial real estate loans are placed on
non-accrual status when the loan becomes 90 days or more contractually
delinquent. Restructured loans are loans which have involved forgiving a portion
of interest or principal on loans made at a rate materially less than that of
market rates.
06/30/97 3/31/97 12/31/96 09/30/96 06/30/96
-------- ------- -------- -------- --------
(Dollars in Thousands)
Total non-accruing loans $ 3,244 $ 3,741 $ 3,590 $1,253 $642
Assets acquired in settlement of loans 352 260 241 233 231
Restructured loans -- 125 340 340 340
-------- ------ ------ ------ -----
Total non-performing and
restructured assets $ 3,596 $ 4,126 $ 4,171 $1,826 $1,213
======= ======= ====== ===== =====
Total non-performing and restructured
assets as a percentage of total assets .30% .38% .37% .16% .12%
==== ==== ==== ==== ====
Management of FirstFederal continuously reviews the loan portfolio to
determine the adequacy of loan loss reserves. This review is based upon
management's assessment of the risks involved in the various types of loans. As
a result of this review, FirstFederal has set aside $4.5 million at June 30,
1997 in reserves to cover potential losses, representing 124.9% of the total
non-performing and restructured assets.
Based on current information, management believes that the allowance for
loan losses is adequate to absorb potential losses in the portfolio. Future
additions may be necessary, however, based upon changing economic conditions,
increased loan balances and the conditions of the underlying collateral.
Liquidity and Capital Resources
- -------------------------------
The Association is required to maintain a minimum level of certain liquid
investments, as defined in the Office of Thrift Supervision (the "OTS")
regulations, of at least 5% of net withdrawable deposits. The Association's
liquidity ratio at June 30, 1997 was 11.0%, which was in excess of the
regulatory requirement,
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compared to 9.5% at December 31, 1996. The increase in the liquidity ratio was
due principally to the increase in investment securities available for sale
reflecting management's efforts to leverage the subordinated debt funds
discussed previously.
The Association's primary sources of funds include loan and
mortgage-backed security repayments or sales, sales of loans, advances from the
FHLB of Cincinnati and deposit inflows. If the Association requires funds beyond
its ability to generate them internally, the Association has additional
borrowing capacity with the FHLB and collateral eligible for reverse repurchase
agreements. The Association uses particular sources of funds based upon
comparative costs and availability. The Association anticipates that it has
adequate liquidity and additional sources of funds to meet all of its
foreseeable commitments.
At June 30, 1997, the Association exceeded all fully phased-in minimum
capital requirements established by the OTS. The management of the Association
is not aware of any proposed regulation or recommendation by the OTS, which, if
implemented, would have a material effect upon the Association. The
Association's capital ratios at June 30, 1997 are set forth below.
OTS Requirement Association Ratio
--------------- -----------------
Tangible Capital 1.5% 8.7%
Leverage (Core) Capital 3.0% 8.7%
Risk-based Capital 8.0% 15.5%
Minimum capital requirements, as required by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), to determine whether
an institution is well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, or critically undercapitalized became effective
December 19, 1992. Well capitalized institutions are defined as having core
capital of at least 5%, core capital to risk-weighted assets of at least 6% and
risk-based capital of at least 10%. The Association's ratios at June 30, 1997
were 8.7%, 14.9% and 15.5%, respectively. As a result, the Association meets the
capital requirements of a well capitalized institution.
The Association's management believes that, under the current
regulations, the Association will continue to meet its capital requirements in
the coming year. Further changes to the capital regulations are possible,
however, which may affect the Association's financial position, or encourage a
change in asset size or mix. In particular, an interest-rate risk component was
incorporated into the risk-based capital framework, however, the OTS has
deferred the implementation of the regulation for an indefinite period of time.
Based on the Association's interest-rate risk profile and the level of interest
rates at June 30, 1997, as well as the Association's level of risk-based
capital, management believes that this regulation will not affect the
Association's compliance with its risk-based capital requirements.
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PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Annual Meeting
--------------
The Annual Meeting of stockholders of the Company was held on
April 16, 1997 in order to consider the election of three
directors of the Company, the approval of the 1997 Omnibus
Incentive Plan and the approval of the 1997 Employee Stock
Purchase Plan.
Election of Directors
---------------------
Messrs. Robert F. Belden, Gust B. Geralis, and Richard E. Herald
were elected to the Board of Directors with terms to expire in
2000. The results of the votes were recorded as follows:
Director For Against Withheld
-------- --- ------- --------
Robert F. Belden 3,135,406 0 63,842
Gust B. Geralis 3,087,317 0 111,931
Richard E. Herald 3,087,190 0 112,058
Continuing as Directors with terms to expire in 1999 are Messrs.
Gary G. Clark, Steven N. Stein and Ronald A. James, Jr. Continuing
with terms to expire in 1998 are Messrs. R. Victor Dix, Daniel H.
Plumly and L. Dwight Douce.
1997 Omnibus Incentive Plan
---------------------------
The FirstFederal Financial Services Corp 1997 Omnibus Incentive
Plan was approved in a vote cast 2,400,328 shares for, 175,146
against, 69,540 abstaining and 554,234 in broker non-votes.
1997 Employee Stock Purchase Plan
---------------------------------
The FirstFederal Financial Services Corp 1997 Employee Stock
Purchase Plan was approved in a vote cast 2,428,763 shares for,
165,678 against, 58,922 abstaining and 554,885 in broker
non-votes.
Item 5. Other Information
-----------------
On July 3, 1997, FirstFederal completed its conversion to a bank
holding company and First Federal Savings and Loan Association of
Wooster changed its name to Signal Bank, N.A. upon completing its
conversion to a national bank.
Dividend
--------
The Company announced on July 22, 1997 that the Board of Directors
declared a cash dividend of $0.11 per common share. The record and
payable dates are August 4, 1997 and August 22, 1997,
respectively.
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
(18) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
Two reports on Form 8-K were filed during the quarterly
period covered by this report. On May 21, 1997, the
Registrant filed a Current Report on Form 8-K reporting the
purchase of seven branches of KeyBank National Association
in north central and north western Ohio. On June 3, 1997,
the Registrant filed a Current Report on Form 8-K reporting
the approval of the Registrant to become a bank holding
company by the Federal Reserve Bank of Cleveland.
All other items have been omitted as not required and not applicable under the
instructions.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTFEDERAL
FINANCIAL SERVICES CORP
-----------------------
(Registrant)
Date August 14, 1997 /s/ Gary G. Clark
------------------------- ----------------------------------
Gary G. Clark
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date August 14, 1997 /s/ James J. Little
------------------------- ----------------------------------
James J. Little
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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