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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 MARCH 31, 1998
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
FIRSTFEDERAL FINANCIAL SERVICES CORP
(Exact name of registrant as specified in its charter)
OHIO 34-1622711
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
135 EAST LIBERTY STREET, WOOSTER, OHIO 44691
(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 8,446,085
(Class) (Shares Outstanding at April 30, 1998)
THIS FORM 10-Q CONTAINS 15 PAGES.
(NO EXHIBIT INDEX)
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FIRSTFEDERAL FINANCIAL SERVICES CORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-13
PART II. OTHER INFORMATION
Signatures 15
Exhibit 27 Financial Data Schedule
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FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ($000'S)
(unaudited)
MARCH 31 December 31
1998 1997
----------- -----------
ASSETS:
Cash and due from banks $28,046 $32,323
Securities available for sale(a) 295,147 253,809
Securities held to maturity(b) 65,711 70,959
Other short term investments 38,798 19,216
Loans held for sale 97,628 86,955
Loans and leases:
Residential mortgage loans 477,580 506,113
Commercial loans 44,113 45,293
Commercial mortgage loans 82,450 72,001
Commercial lease financing 45,870 41,909
Finance contracts 7,900 4,585
Manufactured housing loans 109,928 110,827
Consumer loans 142,326 139,166
Allowance for credit losses (4,562) (5,538)
-------- --------
Net loans and leases 905,605 914,356
Premises and equipment, net 16,867 15,942
Intangible assets 30,450 32,062
Other assets 41,467 31,793
-------- --------
TOTAL ASSETS $1,519,719 $1,457,415
========== ==========
LIABILITIES:
Deposits:
Non-interest bearing demand $51,494 $47,574
Interest bearing 947,152 934,101
--------- --------
Total deposits 998,646 981,675
Short term borrowings 93,862 98,032
Long term borrowings 243,569 249,211
Company obligated mandatorily redeemable
preferred securities 50,000 --
Other liabilities 25,580 23,762
--------- --------
TOTAL LIABILITIES $1,411,657 $1,352,680
SHAREHOLDERS' EQUITY:
Preferred stock(C) 9,917 9,917
Common stock(d) 8,440 8,407
Additional paid-in capital 43,313 43,247
Retained earnings 48,387 45,249
Treasury stock, at cost (1,555) (1,751)
Accumulated other comprehensive income (440) (334)
--------- --------
TOTAL SHAREHOLDERS' EQUITY 108,062 104,735
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,519,719 $1,457,415
========== ==========
(a) Amortized cost of $295,551 as of March 31, 1998 and $254,345 as of December
31, 1997.
(b) Market value of $65,817 as of March 31, 1998 and $71,059 as of December 31,
1997.
(c)Preferred stock, no par value; authorized 1,500,000 shares; Series B 428,842
and 429,892 issued and outstanding, respectively.
(d)Common stock, $1.00 par value; authorized 25,000,000 shares; 8,439,963 (net
of 396,431 treasury shares), 8,406,919 (net of 429,475 treasury shares),
respectively.
See accompanying notes to Consolidated Financial Statements.
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FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31:
($000's except per share data) 1998 1997
---------------- ---------------
INTEREST INCOME:
Loans and leases $21,209 $14,544
Securities available for sale 4,280 2,497
Securities held to maturity 1,163 1,246
Other 572 411
---------------- ---------------
Total interest income 27,224 18,698
INTEREST EXPENSE:
Deposits 11,414 7,662
Short-term borrowings 1,460 941
Long-term debt and mandatorily redeemable
preferred securities 4,834 3,701
---------------- ---------------
Total interest expense 17,708 12,304
---------------- ---------------
NET INTEREST INCOME 9,516 6,394
Provision for credit losses 462 107
---------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 9,054 6,287
NON-INTEREST INCOME
Manufactured housing income 3,674 4,317
Mortgage banking income 1,979 763
Customer service fee income 1,695 843
Net securities gains 20 0
Other 1,359 108
---------------- ---------------
Total non-interest income 8,727 6,031
NON-INTEREST EXPENSE:
Personnel 5,186 3,335
Net occupancy expense 1,134 573
Outside services, data processing and communications 1,666 1,644
Professional fees 596 309
Amortization of intangibles 646 351
Other 2,388 456
---------------- ---------------
Total non-interest expense 11,616 6,668
---------------- ---------------
INCOME BEFORE INCOME TAXES 6,165 5,650
Provision for income taxes 2,106 2,085
---------------- ---------------
NET INCOME $4,059 $3,565
================ ===============
Net income applicable to common stock $3,885 $3,158
NET INCOME PER COMMON SHARE:
Basic $0.46 $0.55
Diluted $0.42 $0.41
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 8,428,399 5,713,176
Diluted 9,561,826 8,667,338
See accompanying notes to Consolidated Financial Statements
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FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three Months Ended March 31: ($000's) 1998 1997
-------------------- --------------
OPERATING ACTIVITIES:
Net income $4,059 $3,565
Adjustments to reconcile net income to net cash (used by) provided
by operating activities:
Provision for credit losses 462 107
Depreciation, amortization and accretion 2,259 716
Net securities (gains) (20) --
Net gain on sales of loans (2,987) (2,716)
Proceeds from sales of loans held for sale 143,392 74,646
Origination of loans held for sale (151,078) (40,929)
(Increase) in other assets (11,661) (11,286)
Increase in other liabilities 1,712 3,927
-------------------- --------------
NET CASH (USED BY) PROVIDED BY OPERATING ACTIVITIES (13,862) 28,030
INVESTING ACTIVITIES:
Proceeds from calls, paydowns and maturities of
securities available for sale 71,940 36,024
Purchases of securities available for sale (110,873) (39,332)
Proceeds from maturities of securities held to maturity 5,248 3,070
(Increase) decrease in other short-term investments (19,582) 48
(Increase) decrease in loans and leases 8,289 (25,688)
Purchases of premises and equipment, net (1,970) (539)
-------------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (46,948) (26,417)
FINANCING ACTIVITIES:
Increase (decrease) in core deposits 16,971 (9,238)
Net change in short-term borrowings (4,170) (26,539)
Net change in long-term borrowings (5,642) 36,730
Proceeds from issuance of mandatorily redeemable
preferred securities 50,000 --
Cash dividends paid (921) (851)
Stock issued for options exercised and employee stock
purchase plan 295 165
-------------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 56,533 267
-------------------- --------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (4,277) 1,880
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 32,323 26,012
-------------------- --------------
CASH AND DUE FROM BANKS AT END OF PERIOD $28,046 $27,892
==================== ==============
See accompanying notes to Consolidated Financial Statements.
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FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles 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
1997 Annual Report on Form 10-K 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 and its subsidiaries. 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 March
31, 1998 and December 31, 1997, the results of its operations for the three
months ended March 31, 1998 and 1997, and its cash flows for the three months
ended March 31, 1998 and 1997. 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. Certain financial statement reclassifications have
been made for 1997 to conform to classifications used in 1998.
(2) EARNINGS PER SHARE
Earnings per share is calculated by dividing net income available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period. The assumed conversion of convertible
preferred stock and the exercise of stock options is included in the calculation
of diluted earnings per share.
SFAS No. 128, "Earnings Per Share," was adopted for 1997 with all
prior-period earnings per share data restated. The statement requires dual
presentation of basic earnings per share and diluted earnings per share on the
Consolidated Statements of Income. A reconciliation of Basic Earnings Per Share
to Diluted Earnings Per Share for the three months ended March 31 is as follows:
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
---- ----
---------------------------------------------------------------------------------------------
(000's) Per Share Per Share
except per share data Income Shares Amount Income Shares Amount
- --------------------- ------ ------ ------ ------ ------ ------
BASIC EPS
Net income available to
common shareholders $3,885 8,428 $0.46 $3,158 5,713 $0.55
EFFECT OF DILUTIVE
SECURITIES
Stock options 231 0.01 99 0.01
Convertible Preferred
Stock 174 903 0.03 407 2,855 0.13
--------------------------------- ---------------------------- ------------------------------
DILUTED EPS
Net income available to
common shareholders
plus assumed
conversions $4,059 9,562 $0.42 $3,565 8,667 $0.41
- ----------------------------------------------------------------------------------------------------------------------------
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(3) STOCK SPLIT AND DIVIDENDS ON COMMON AND PREFERRED STOCK
On April 23, 1998, the Board of Directors declared a five-for-four
stock split, effecting a 25% stock dividend to shareholders of record on
May 4, 1998. All per share data has been restated to reflect this dividend.
The Company's Board also declared a cash dividend of $0.11 per common share.
The cash dividend will be paid on the post stock dividend shares to
shareholders of record at May 4, 1998 and will be paid May 22, 1998.
The Board of Directors also declared a cash dividend of $0.40625 per
share on the 6 1/2% Cumulative Convertible Preferred Stock, Series B. The
dividend will be paid June 1, 1998 to shareholders of record as of May 11, 1998.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income."
The Statement requires additional reporting of items that affect comprehensive
income but not net income. Items relevant to the Company include unrealized
gains and losses on securities. Comprehensive income for the three months ended
March 31 was as follows ($000's):
1998 1997
----------------- ---------------
Net income $4,059 $3,565
Unrealized loss on securities available for sale (106) (250)
----------------- ---------------
Comprehensive income $3,953 $3,315
================= ===============
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June, 1997 and is effective for fiscal years
beginning after December 15, 1997. The provisions of this statement do not apply
to interim periods in the year of adoption. The statement requires financial
disclosure and descriptive information about reportable operating segments and
will result in additional financial statement disclosures.
(5) LOANS HELD FOR SALE
Loans held for sale include $47.6 million of residential mortgage loans
and $50 million of manufactured housing loans as of March 31, 1998 compared to
$37 million of residential mortgage loans and $50 million of manufactured
housing loans as of December 31, 1997.
(6) PENDING ACQUISITION
On February 9, 1998, the Company announced the signing of a definitive
agreement for the acquisition of First Shenango Bancorp, Inc. ("First
Shenango"). First Shenango's wholly-owned subsidiary, First Federal Savings Bank
of New Castle, is expected to become a separate operating subsidiary of the
Company and operate under its current name and banking charter. Under the terms
of the agreement, the Company will exchange 1.429 shares of its common stock, as
adjusted for the five-for-four stock split, for each of the 2,069,007
outstanding shares of First Shenango stock and 109,074 outstanding options.
Based on the closing price per share of the Company's common stock on May 4,
1998, the transaction would be valued at approximately $102.7 million, or $47.15
per share of the First Shenango stock. The merger, which will be accounted for
as a pooling of interests, is expected to be consummated late in the second
quarter or early in the third quarter of 1998, pending approval by First
Shenango's and the Company's shareholders, regulatory authorities and other
customary conditions for closing. First Shenango had total assets of $403.1
million, deposits of $275.4 million and shareholders' equity of $48.3 million at
March 31, 1998.
(7) SIGNAL TRUST
In February 1998, the Company formed Signal Capital Trust One ("Signal
Trust"),a Delaware business trust. Signal Trust was formed for the purpose of
(I) issuing and selling $50 million of its 8.67% Capital Securities, Series A
(the "Capital
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Securities"), referred to in the Consolidated Balance sheet as "company
obligated mandatorily redeemable preferred securities," and common securities
(the "Common Securities"), (ii) investing the proceeds thereof in the 8.67%
Junior Subordinated Deferrable Interest Debentures, Series A, issued by the
Company (the "FirstFederal Debentures") and (iii) engaging in certain other
limited activities. The Capital Securities were issued and sold to investors in
a private placement exempt from the Securities Act of 1933 on February 10, 1998.
The Company filed a registration statement with the Securities and Exchange
Commission for these securities on May 13, 1998. The Company is the sole owner
of the Common Securities. Distributions on the Capital Securities are guaranteed
by the Company, are cumulative, began accumulating on February 13, 1998 and are
payable semi-annually in arrears on February 15 and August 15 of each year,
commencing August 15, 1998 at the annual rate of 8.67% of the liquidation amount
of $1,000 per security. The interest payment schedule of the FirstFederal
Debentures is identical to that of the Capital Securities, except that so long
as the Company is not in default under the indenture governing the FirstFederal
Debentures, the Company may defer the payment of interest on the FirstFederal
Debentures at any time and from time to time for a period not exceeding ten
consecutive semi-annual periods (an "Extension Period"). During any Extension
Period, the Company will be prohibited from taking certain actions, including
declaring or paying any dividends or distributions on or redeeming or purchasing
any of its capital stock.
(8) MANUFACTURED HOUSING
The Company, through its subsidiary Mobile Consultants, Inc. (MCi)
sells certain manufactured housing finance contracts (MHF contracts) to various
financial institutions while retaining collection and recovery aspects of
servicing.
The Company's subsidiary, Signal Bank, N.A., purchases MHF contracts
from MCi, a portion of which are packaged in asset-backed securitizations (ABS
pools) and sold to investors. Sales and securitizations totaled $50 million each
in the three months ended March 31, 1998 and March 31, 1997. The aggregate
amount of ABS pools serviced by the Company totaled $231.2 million at March 31,
1998 and $186.2 million at December 31, 1997.
At the time of sale the Company records an asset, "retained interest in
securitized assets" which represents the discounted cash flows to be received by
the Company for 1) servicing income from ABS pools, 2) principal and interest
payments on MHF contracts contributed to the ABS pools as a credit enhancement,
referred to as overcollateralization, and 3) excess interest spread. These cash
flows are projected and discounted over the expected life of the ABS pools using
assumptions for credit risk, estimated prepayments and interest rates. The cash
flows are subject to volatility that could materially affect operating results.
Prepayments resulting from increased competition, obligor mobility, general and
regional economic conditions and prevailing interest rates, as well as actual
losses incurred, may vary from the performance the Company projects. In
aggregate, actual cash flow from the Company's five ABS pools have performed as
expected with cash flow on three ABS pools exceeding expectations and cash flow
on two of the ABS pools currently lower than projections. At March 31, 1998
management has determined that there is no permanent impairment that would
require adjustment to the carrying value of the retained interest in securitized
assets. Management continues to review the cash flow and actual performance of
the ABS pools on a quarterly basis.
The Company classifies the retained interest in securitized assets in
two components on the Company's Consolidated Balance Sheet, 1) securities held
for sale and 2) excess servicing included in the balance sheet as other assets.
Total retained interest in securitized assets and excess servicing were $36.7
million and $27.0 million at March 31, 1998 and December 31, 1997, respectively.
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The components of manufactured housing income for the three months
ended March 31 were as follows:
($000's) 1998 1997
---------------- -------------
Gain on sale of ABS pools $1,538 $2,325
Manufactured housing brokerage fees 994 639
Servicing income on brokered MHF contracts 1,000 1,200
Servicing income on ABS pools 142 153
---------------- -------------
TOTAL MANUFACTURED HOUSING INCOME $3,674 $4,317
================ =============
(9) MORTGAGE BANKING INCOME
The Company has sold certain residential mortgage loans to various
investors while retaining servicing rights. Loans serviced for others totaled
$535 million at March 31, 1998 and $521 million at December 31, 1997 and are not
included in the accompanying Consolidated Financial Statements.
The components of mortgage banking income for the three months ended
March 31 were as follows:
($000's) 1998 1997
------------------- ---------------
Gain on sale of mortgage loans $1,449 $391
Mortgage loan fee income 186 82
Mortgage servicing fees, net of amortization 344 290
------------------- ---------------
TOTAL MORTGAGE BANKING INCOME $1,979 $763
=================== ===============
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FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
FirstFederal Financial Services Corp recorded net earnings of $4.1
million, or $.42 per share on a diluted basis for the three month period ended
March 31, 1998. This compares favorably to $3.6 million, or $.41 per share on a
diluted basis for the three month period ended March 31, 1997.
Increased earnings in the first quarter of 1998 compared to 1997
reflect increases in net interest income of $3.1 million, mortgage banking
income of $1.2 million and customer service fee income of $.9 million, partially
offset by an increase in non-interest expense of $4.9 million related to a
higher volume of asset originations.
Return on average assets (ROA) for the quarter ended March 31, 1998 was
1.09 % as compared to 1.32 % for the comparable period of 1997. Return on
average shareholders' equity (ROE) for the quarter ended March 31, 1998 was
15.26% as compared to 16.47% for the comparable period in 1997. The Company's
ratio of shareholders' equity to total assets decreased from 7.19% at December
31, 1997 to 7.11% at March 31, 1998, reflecting asset growth and improved
leverage in 1998.
Net interest income increased $3.1 million to $9.5 million in the first
quarter of 1998 from $6.4 million in the first quarter of 1997. This increase
reflects growth in average loan and lease balances of $281.2 million and a
$111.5 million increase in average securities balances for the three month
period ended March 31, 1998 compared to 1997. Loan and lease balances as of
March 31, 1998 include $77.0 million and $29.8 million reflecting the
acquisition of Summit Bank N.A. (Summit) and Alliance Corporate Resources, Inc.
(ACR), respectively in the third quarter of 1997. The net interest margin of
2.76% for the quarter ended March 31, 1998 compares favorably to 2.62% for 1997
and 2.59% for the first quarter of 1997. Yields on interest earning assets
averaged 7.89% for the quarter ended March 31, 1998 compared to 7.58% for 1997
reflecting a favorable change in the mix of loans and leases to higher yielding
assets. The average cost of interest-bearing liabilities increased 13 basis
points to 5.21 % for the quarter ended March 31, 1998 compared to 5.08 % for the
same period in 1997. Comparing first quarter 1998 to 1997, 6 basis points of the
13 basis point increase in cost of interest bearing liabilities reflects
increased rates paid on borrowings and the other 7 basis points of the increase
reflects the incremental cost of the issuance of $50 million of Capital
Securities in February 1998 with an 8.67% coupon and a current effective yield
of approximately 8%, reflecting an interest swap, and the $40.5 million of
subordinated notes issued in March 1997 with a current effective yield of 7.1%.
Portions of both debt issues qualify as Tier 1 and Tier 2 regulatory capital.
Issuance of both the FirstFederal Debentures and the subordinated notes provides
additional capacity for the Company to leverage future asset growth, purchase
deposits and/or acquire other financial services businesses.
The provision for credit losses was $462,000 in the first quarter of
1998 and $107,000 in the first quarter of 1997. The increased provision was
taken primarily in connection with the acquisition of Summit and a continuing
increase in commercial and consumer loan originations which inherently have a
higher credit risk level than residential mortgage loans. Net charge-offs as a
percentage of average loans and leases for the first quarter of 1998 were 15
basis points (60 basis points annualized) and less than 1 basis point (4 basis
points annualized) for the comparable quarter of 1997. The Company anticipates
net charge-offs in the remaining three quarters of 1998 will on a per quarter
basis be less than net charge-offs recorded in the first quarter of 1998.
Nonperforming assets as a percentage of total assets was .29% at March 31, 1998
and .32% at December 31, 1997.
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Non-interest income increased $2.7 million for the first quarter of
1998 versus first quarter 1997 reflecting an increase of $1.2 million in
mortgage banking fee income and $.9 million in customer service fee income.
Non-interest expense increased $4.9 million to $11.6 million for the
quarter ended March 31, 1998 as compared to $6.7 million for the first quarter
of 1997. The increase is comprised primarily of higher compensation expense
($1.9 million), increased occupancy costs ($.6 million) and additional operating
costs ($2.5 million). FirstFederal's efficiency ratio of 60.13% for the first
quarter of 1998 compares to 56.98% for the fourth quarter of 1997 and 50.83% for
the first quarter of 1997. The increases in 1998 in both non-interest expense
and the efficiency ratio reflect the increase in staff and facilities associated
with the Company's acquisitions of Summit and ACR, branch acquisitions and
additional investments in additional commercial and manufactured housing loan
origination capacity. First quarter loan originations are seasonally slower than
the remainder of the year, which when added to expenses incurred to increased
loan origination capacity, results in a higher first quarter efficiency ratio.
FINANCIAL CONDITION HIGHLIGHTS
Certain aspects of the Company's financial condition during 1998 are as follows
($000's):
MARCH 31 December 31 Increase
1998 1997 (Decrease)
-------------------- ---------------------- --------------------
Securities available for sale $295,147 $253,809 $41,338
Net loans and leases 905,605 914,356 (8,751)
Deposits 998,646 981,675 16,971
Borrowings 387,431 347,243 40,188
The $41.3 million increase in securities available for sale and the
$40.2 million increase in borrowings as of March 31, 1998 both reflect the
February 1998 issuance of and investment of the proceeds of $50 million in 8.67%
Capital Securities.
Net loans and leases decreased $8.8 million comparing March 31, 1998 to
December 31, 1997 reflecting a $28.5 million decrease in residential mortgage
loans, partially offset by net increases in commercial loans and leases of $16.5
million and a $3.3 million increase in consumer loans. Loan originations for the
first quarter of 1998 of residential mortgage loans and manufactured housing
finance contracts of $92.2 million and $66.5 million, respectively, compare to
$50.2 million and $40.2 million for the first quarter of 1997, respectively. The
$28.5 million decrease in residential mortgage loans reflects the sale of
approximately $75 million in mortgage loans in the first quarter of 1998 and the
impact of mortgage refinancings and expected loan amortization offset by the
first quarter originations of $92.2 million. Whereas, mortgage loan outstandings
decreased as of March 31, 1998, the mortgage servicing portfolio increased $14.2
million in the first quarter of 1998 which will provide future non-interest
income. Higher mortgage loan originations somewhat distorts comparability of the
efficiency ratio between periods. The Company securitized and sold $50
million of manufactured housing finance contracts in the first quarter of 1998.
Deposits increased $17.0 million comparing March 31, 1998 to December
31, 1997 reflecting a $.5 million decrease in brokered deposits and a net
increase of $17.5 million in customer deposits.
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CREDIT RISK
The Company provides as an expense an amount for expected credit
losses. The provision is based on the growth of the loan and lease portfolio and
on recent loss experience. Actual losses on loans and leases are charged against
the allowance for loan losses. The provision for loan losses was $462,000 in the
three months ended March 31, 1998 as compared to $107,000 in the three months
ended March 31, 1997. Charge-offs, net of recoveries were $1,438,000 and $16,000
for the three months ended March 31, 1998 and 1997, respectively. The Company
anticipates net charge-offs in the remaining three quarters of 1998 will on a
per quarter basis be less than net charge-offs recorded in the first quarter of
1998. Net charge-offs as a percentage of average loans and leases were 15 basis
points in the three months ended March 31, 1998 as compared to 1 basis point for
the comparable period of 1997.
The Company defines underperforming assets as 1) nonaccrual loans and
leases on which the ultimate collectibility of the full amount of interest is
uncertain, 2) loans and leases which have been renegotiated to provide for a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower, 3) loans and leases past due 90 days or more
as to principal or interest and 4) other real estate owned. Underperforming
assets, including nonaccrual loans of $4.2 million and $4.4 million, were
$4.6 million and $4.8 million at March 31, 1998 and December 31, 1997,
respectively.
Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or the fair
value of the underlying collateral. Impaired loans have been defined as all
nonaccrual loans.
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of an adequate level of liquidity is necessary to
ensure that sufficient funds are available to meet customers' loan demand and
deposit withdrawals. The banking subsidiaries' liquidity sources consist of
short-term marketable securities, maturing loans and selected securitizable loan
assets. Liquidity has also been obtained through liabilities such as
customer-related core deposits, funds borrowed, certificates of deposit and
public funds deposits. The Company has additional borrowing capacity with the
Federal Home Loan Bank of Cincinnati and additional collateral eligible for
repurchase agreements in the event internally generated funds are insufficient
to meet liquidity needs. The Company anticipates that it has adequate liquidity
and additional sources of funds to meet all of its foreseeable commitments.
At March 31, 1998, shareholders' equity was $108 million, compared to
$105 million at December 31, 1997, an increase of $3 million or 3.0%, primarily
reflecting net income for the three months ending March 31, 1998, net of
dividends. Shareholders' equity as a percentage of total assets as of March 31,
1998 was 7.11% compared to 7.19% as of December 31, 1997. The Federal Reserve
Board has adopted risk-based capital guidelines which assign risk weightings to
assets and off-balance sheet items and also define and set minimum capital
requirements (risk-based capital ratios). The guidelines also define "well
capitalized" ratios of Tier 1, total capital and leverage as 6%, 10% and 5%
respectively. The Company's subsidiary banks, Signal Bank N.A. and Summit Bank
N.A., exceeded the minimum guidelines for well capitalized institutions at both
March 31, 1998 and December 31, 1997. At March 31, 1998, the Company had a Tier
1 risk-based capital ratio of 12.64%, a total risk-based capital ratio of 18.35%
and a leverage ratio of 8.32%. At December 31, 1997, the Company had Tier 1
risk-based capital ratio of 8.18%, a total risk-based capital ratio of 12.89%
and a leverage ratio of 5.23%. Portions of the FirstFederal Debentures qualify
as Tier 1 and Tier 2 regulatory capital. Issuance of the FirstFederal
Debentures provide additional capacity for the company to leverage future asset
growth, purchase deposits and/or acquire other financial services business.
In February 1998, the Company issued $50 million of 8.67% Capital
Securities which was used to pay down short term borrowings, provide funds for
loan originations and as a source of additional capital to support future growth
activities. Interest on the Capital Securities is payable semi-annually
beginning in August 1998. The Capital Securities are redeemable at the option of
the Company after February 2008 until its maturity in February 2028.
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IMPACT OF THE YEAR 2000
The Company has conducted a comprehensive review of its computer
systems to identify applications that could be affected by the "Year 2000"
issue, and has developed an implementation plan to address the issue. The
Company's data processing is performed primarily in-house, however software and
hardware utilized is under maintenance agreements with third party vendors,
consequently the Company is very dependent on those vendors to conduct its
business. The Company has already contacted each vendor to request time tables
for Year 2000 compliance and expected costs, if any, to be passed along to the
Company. To date, the Company has been informed that its primary service
providers anticipate that all reprogramming efforts will be completed by
December 31, 1999, allowing the Company adequate time for testing. Certain other
vendors have not yet responded, however, the Company will pursue other options
if it appears that these vendors will be unable to comply. Management does not
expect these costs to have a significant impact on its financial position or
results of operations however, there can be no assurance that the vendors
systems will be Year 2000 compliant, consequently the Company could incur
incremental costs to convert to another vendor. The Company has identified
certain of its hardware and software equipment that will not be Year 2000
compliant and intends to purchase new equipment and software prior to December
31, 1998. These capital expenditures are expected to total approximately $2.0
million.
FORWARD LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "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
risks and uncertainties, including but not limited to 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, all or some of which would 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, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management considers interest rate risk to be the Company's most
significant market risk. Interest rate risk is the exposure to adverse changes
in the net interest income of the Company as a result of changes in interest
rates. Consistency in the Company's earnings is largely dependent on the
effective management of interest rate risk.
There have been no significant changes to the Company's interest rate
risk position or to the practices used by the Company to manage interest rate
risk since December 31, 1997.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2 - Definitive agreement for the acquisition of First
Shenango Bancorp, Inc.*
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
- One report on Form 8-K was filed on February 3,
1998 with respect to the Company's earnings release
for the year ended December 31, 1997.
- One report on Form 8-K was filed on February 9,
1998 with respect to the announcement of the signing
of a definitive merger agreement with First Shenango
Bancorp, Inc.
- One report on Form 8-K was filed on May 1, 1998
with respect to the Company's earnings release for
the quarter ended March 31, 1998.
All other items have been omitted as not required and not applicable under the
instructions.
* Filed as an exhibit to First Shenango Bancorp's current report on Form
8-K filed with the Securities and Exchange Commission on February 23,
1998.
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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 May 15, 1998 /s/ GARY G. CLARK
Gary G. Clark
Chairman and Chief Executive Officer
(Duly Authorized Representative)
Date May 15, 1998 /s/ JON W. PARK
Jon W. Park
Chief Financial Officer (Principal
Financial and Accounting Officer)