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 September 30, 1996
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 (IRS Employer
incorporation or organization) 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 3,612,590
- ----------------------------- ----------------------------------------
(Class) (Shares Outstanding at October 22, 1996)
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
September 30, 1996 and December 31, 1995........................... 3
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 1996 and 1995.................. 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995.................................. 5
Notes to Consolidated Financial Statements......................... 6-8
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 9-17
PART II. OTHER INFORMATION .............................................. 18
Signatures......................................................... 19
Exhibit Index...................................................... 20
Exhibit............................................................ 21
2
PART I. FINANCIAL INFORMATION
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1996 1995 (1)
ASSETS (unaudited)
------------- ------------
Cash on hand and in other financial institutions $ 24,813 $ 18,621
Interest-bearing deposits in other financial
institutions 1,990 8,862
---------- --------
Total cash and cash equivalents 26,803 27,483
Investment securities:
Available for sale (Amortized cost of $24,913 and $41,720,
respectively) 24,641 41,953
Held to maturity (Fair value of $6,290 and $3,737, respectively) 6,335 3,795
Mortgage-backed securities:
Available for sale (Amortized cost of $102,974 and $174,981,
respectively) 100,672 174,974
Held to maturity (Fair value of $79,971 and $85,847,
respectively) 81,898 86,147
Loans held for sale 58,654 36,664
First mortgage and other loans, net 749,348 544,396
Accrued interest receivable 6,697 6,284
Stock in Federal Home Loan Bank of Cincinnati, at cost 16,680 14,172
Premises and equipment, net 9,788 7,442
Cost in excess of fair value of net assets acquired 10,911 2,575
Other assets 18,296 1,385
----------- ---------
$1,110,723 $947,270
========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 638,393 $574,041
Advances from the Federal Home Loan Bank and
other borrowings 372,624 286,726
Advance payments by borrowers for taxes and insurance 1,494 3,714
Accrued expenses and other liabilities 15,828 6,256
------------ ---------
TOTAL LIABILITIES 1,028,339 870,737
---------- -------
Shareholders' Equity:
Serial preferred stock, no par value:
authorized 1,500,000 shares; Series A, 500,094 and 538,847 shares issued
and outstanding, respectively, Series B, 480,977
and 496,500 shares issued and outstanding, respectively 22,779 24,132
Common stock, $1.00 par value; authorized 20,000,000
shares; issued and outstanding 4,052,757 and 3,405,176
shares, respectively 4,053 3,405
Paid-in capital 29,484 16,310
Retained earnings 30,482 35,338
Treasury stock, at cost (440,408 and 430,801 shares, respectively) (2,753) (2,799)
Unrealized gain(loss) on securities available for sale (1,661) 147
------------ ----------
82,384 76,533
------------ --------
$1,110,723 $947,270
========= =======
<FN>
- ----------
(1) Derived from audited financial statements at December 31, 1995.
</FN>
See accompanying notes to consolidated financial statements.
3
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME:
Loans $15,076 $10,978 $40,700 $31,278
Mortgage-backed securities 2,950 4,500 10,564 13,651
Investment securities and other interest income 589 877 2,092 2,390
Dividends on stock in Federal Home Loan Bank of Cincinnati 266 241 763 670
-------- -------- -------- --------
TOTAL INTEREST & DIVIDEND INCOME 18,881 16,596 54,119 47,989
------ ------ ------ ------
INTEREST EXPENSE:
Deposits 7,412 6,323 21,408 17,501
Borrowings 4,970 4,440 13,472 12,546
------- ------ ------- -------
TOTAL INTEREST EXPENSE 12,382 10,763 34,880 30,047
------ ------ ------ ------
NET INTEREST INCOME 6,499 5,833 19,239 17,942
Provision for losses on loans 90 - 270 -
--------- ----------- -------- ----------
NET INTEREST INCOME AFTER PROVISION 6,409 5,833 18,969 17,942
------- ------ ------ ------
OTHER INCOME:
Net gains on sales of loans 245 418 1,084 895
Net gains on sales of investments and mortgage-backed securities 4 126 331 264
Manufactured housing brokerage fees, net 2,618 - 5,882 -
Other operating income 2,015 577 4,451 1,617
------ -------- ------ ------
TOTAL OTHER INCOME 4,882 1,121 11,748 2,776
------ ------- ------ ------
OPERATING EXPENSES:
Compensation and related benefits 2,784 1,464 7,149 4,194
Premises & equipment 538 420 1,455 1,248
Federal insurance premium 3,699 293 4,360 870
Professional and other fees 144 205 746 604
State taxes 310 217 860 686
Other operating expenses 2,527 913 5,644 2,414
------- ------- ------ ------
TOTAL OPERATING EXPENSES 10,002 3,512 20,214 10,016
------ ------ ------ ------
Earnings before Federal income taxes 1,289 3,442 10,503 10,702
Federal income taxes 507 1,169 3,818 3,676
------- ------- ------- ------
NET EARNINGS $ 782 $ 2,273 $ 6,685 $ 7,026
======== ====== ====== =======
NET EARNINGS APPLICABLE TO COMMON STOCK $ 365 $ 1,835 $ 5,403 $ 5,679
======== ====== ======= ======
NET EARNINGS PER COMMON SHARE (NOTE 3)
PRIMARY $ .10 $ .55 $ 1.53 $ 1.72
FULLY DILUTED $ .14 $ .43 $ 1.22 $ 1.32
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
PRIMARY 3,672,277 3,307,125 3,541,035 3,307,332
FULLY DILUTED 5,560,966 5,280,513 5,500,172 5,332,995
See accompanying notes to consolidated financial statements.
4
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................................... $ 6,685 $ 7,026
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provisions for losses on loans ....................................... 270 --
Net gains from sales ................................................. (1,415) (1,159)
Accretion of discounts, amortization of premiums and depreciation, net 1,353 857
Proceeds from sale of loans held for sale ............................ 58,798 53,309
Disbursements for loans held for sale ................................ (31,897) (66,089)
Other ................................................................ (16,477) 3,266
--------- ---------
Net cash provided by operating activities .......................... 17,317 (2,790)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated ...................................................... (396,584) (151,015)
Principal repayments of mortgage and other loans ...................... 143,930 83,651
Proceeds from:
Mortgage-backed securities repayments and sales
Available for sale ................................................ 100,316 30,904
Held to maturity .................................................. 6,942 10,726
Investment securities repayments and sales
Available for sale ................................................ 34,962 22,184
Held to maturity .................................................. 171 395
Assets acquired in settlement of loan sales ......................... 283 121
Purchases of:
Mortgage-backed securities
Available for sale ................................................ (23,952) (16,637)
Held to maturity .................................................. (6,945) (9,612)
Investment securities
Available for sale ................................................ (17,943) (29,958)
Held to maturity .................................................. (2,693) (498)
Net cash received in acquisitions .................................... 24,606 --
Purchase of premises and equipment, net .............................. (2,233) (361)
Net cash used by investing activities .............................. (139,140) (60,100)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .............................................. 37,925 39,481
Proceeds from Federal Home Loan Bank advances ......................... 244,000 134,700
Repayments on Federal Home Loan Bank advances ......................... (177,748) (111,348)
Net proceeds from securities sold under agreement to repurchase ....... 18,193 18,655
Net decrease in advance payments by borrowers for taxes and insurance . (2,220) (1,208)
Repurchase of common and preferred stock .............................. (2,375) (1,744)
Proceeds from common stock transactions ............................... 5,883 48
Payment of cash dividends ............................................. (2,515) (2,395)
--------- ---------
Net cash provided by financing activities .......................... 121,143 76,189
--------- ---------
Net increase in cash & cash equivalents ............................... (680) 13,299
Cash and cash equivalents at beginning of year ........................ 27,483 10,951
--------- ---------
Cash and cash equivalents at end of period ............................ $ 26,803 $ 24,250
========= =========
See accompanying notes to consolidated financial statements.
5
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information and the instructions to Form 10-Q. It is assumed that the
readers of these interim financial statements have read or have access to the
1995 Annual Report of FirstFederal Financial Services Corp ("FirstFederal" 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.
In the opinion of management, the condensed Consolidated Financial
Statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial condition of FirstFederal
as of September 30, 1996 and December 31, 1995, and the results of its
operations for the three and nine months ended September 30, 1996 and 1995, and
its cash flows for the nine months ended September 30, 1996 and 1995. The
results of operations for the interim period reported herein are not necessarily
indicative of results of operations to be expected for the entire year.
Financial statement reclassifications have been made for 1995 to conform to
classifications used in 1996.
(2) Commitments
At September 30, 1996, the Association had outstanding commitments to
originate loans aggregating approximately $19.1 million and outstanding
commitments to sell loans of $50.7 million. There were no outstanding
commitments to purchase or sell mortgage-backed securities or investment
securities at September 30, 1996.
(3) Earnings Per Share of Common Stock
Primary earnings per share were computed based on the weighted average
number of common shares and common stock equivalent shares outstanding during
the period, after giving effect to the reduction of earnings by the dividend
paid on the cumulative serial preferred stock. Exercisable stock options are
included as common share equivalents. The fully diluted earnings per share
assume the conversion of the Series A and Series B cumulative serial preferred
stock. Per share information has been adjusted to reflect the 10% common stock
dividends granted to the shareholders of record on May 2, 1995 and 1996. All
share and per share data presented herein have been restated for the effect of
the stock dividends in 1995 and 1996.
6
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Cash Dividends on Common and Preferred Stock
On July 17, 1996, the Board of Directors declared cash dividends for the
common stock and Series A and Series B Preferred Stock. The $.12 per common
share dividend was paid on August 22, 1996 to shareholders of record as of
August 2, 1996. The Series A preferred dividend of $.4375 per share was paid on
September 3, 1996 to shareholders of record as of August 12, 1996 and the Series
B preferred dividend of $.40625 per share was also paid on September 3, 1996 to
shareholders of record as of August 12, 1996.
(5) Recently Issued Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 122 "Accounting
for Mortgage Servicing Rights", issued May, 1995, amended Financial Accounting
Standards Board Statement No. 65 "Accounting for Certain Mortgage Banking
Activities" to eliminate the accounting distinction between rights to service
mortgage loans for others that are acquired through loan origination activities
and those acquired through purchase transactions. Under the statement, when the
Company sells or securitizes loans and retains the mortgage servicing rights, it
is required to allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. Any cost allocated to mortgage servicing rights is
recognized as a separate asset. The Company adopted this statement effective
January 1, 1996. The impact of this statement on the financial statements has
been immaterial. The Company is recognizing approximately 1% of the loan
principal balances sold as mortgage servicing right assets, and a corresponding
increase in gains on sales of loans, although there can be no assurances this
amount will continue.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which was effective for the
Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation costs based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share.
(6) Acquisitions
On March 23, 1996, the Association acquired a branch located in Mt.
Vernon, Ohio from Peoples National Bank, Wooster, Ohio. In connection with the
acquisition, the Association assumed deposit liabilities of $26.6 million and
acquired fixed assets, deposit loans and cash. The purchase of the branch was
accounted for by the purchase method of accounting and, accordingly, the assets
and liabilities were recorded at their estimated fair value at the date of
acquisition. The purchase resulted in a cost in excess of fair value of net
assets of $2.4 million, which will be amortized by the straight-line method over
ten years. The former Peoples branch has been closed and its deposits
transferred to the existing Mt. Vernon branch of the Association on South Main
Street.
7
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 3, 1996, the Company acquired Mobile Consultants, Inc. ("MCi")
of Alliance, Ohio, an originator and servicer of manufactured home loans for
other financial institutions. MCi originates primarily non-mortgage, consumer
loan contracts through dealers of manufactured homes located in 22 eastern and
midwest states. MCi also services the collection and recovery of troubled loans
for the financial institutions which originate the loans. The Company acquired
$7.1 million in assets composed primarily of advances receivable on manufactured
home loans and furniture and fixtures. The Company also assumed the liabilities
of MCi, which consist mainly of accounts payable to dealers and lines of credit.
The purchase price of $10.6 million was comprised of $1 million in cash, $4
million in notes due quarterly during 1997, and 307,386 shares of the Company's
common stock, valued at $5.6 million. The purchase method of accounting was used
and, accordingly, the assets and liabilities were recorded at their estimated
fair value at the date of acquisition. The purchase resulted in a cost in excess
of fair value of net assets of $9.6 million, which will be amortized by the
straight-line method at no longer than 10 years.
MCi contributed approximately $1.0 and $2.2 million to the Company's net
earnings for the quarter and nine months ended September 30, 1996, respectively.
The earnings and expenses were consolidated into the financial statements and
will become a significant part of future operations.
8
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company had net earnings of $0.8 million, or $0.10 per common share,
and $6.7 million, or $1.53 per common share, for the three and nine month
periods ended September 30, 1996, respectively. This lower level of earnings
includes a one-time assessment of $3.3 million, $2.2 million after tax, for the
re-capitalization of the Savings Association Insurance Fund ("SAIF"). (See
Regulatory Action Regarding Insurance Assessments.) Excluding the SAIF
assessment, net earnings were $3.0 million, or $.69 per common share, and $8.9
million, or $2.14 per common share, for the three and nine month periods ended
September 30, 1996, respectively. This compares favorably to net earnings of
$2.3 million, or $.55 per common share, and $7.0 million, or $1.72 per common
share, for the three and nine months ended September 30, 1995, respectively. The
increase in net earnings of $0.7 million, or 30%, and $1.8 million, or 26%, for
the three and nine month periods in 1996 from the same periods in 1995 is
primarily attributable to the income from MCi from the origination of
manufactured housing loans and other retail deposit fees partially offset by
increased operating expenses.
The annualized return on average assets ("ROA") for the three and nine
months periods ended September 30, 1996, excluding the SAIF assessment, were
1.10% and 1.15%, respectively, as compared to 1.00% and 1.07% for the three and
nine month periods ended September 30, 1995, respectively. The annualized return
on shareholder's equity ("ROE") for the three and nine month periods ended
September 30, 1996, excluding the SAIF assessment, were 14.12% and 14.73%,
respectively, as compared to 12.29% and 12.94% for the same periods in 1995. The
annualized ROA including the SAIF assessment was 0.29% and 0.87% and ROE was
3.79% and 11.19% for the three and nine month periods ended September 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.
9
The following table presents for the periods indicated the average
interest-earnings assets and the average yields, the average interest-bearing
liabilities and average rates and the interest rate margin. All average balances
are daily average balances.
Three Months Ended
September 30,
---------------------------------
1996 1995
------------------------ ---------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Rate 1 Balance Rate 1
------- ------ ------- ------
(Dollars in Thousands)
Net interest income .......................... $ 6,500 $ 5,832
========== ==========
Interest-earning assets:
Mortgage loans ............................. $ 759,006 7.95% $ 539,722 8.14%
Mortgage-backed securities ................. 189,238 6.24 269,247 6.68
Investments ................................ 55,022 6.21 68,910 6.49
---------- ---------- ---------- ----------
Total average interest-earning assets .... 1,003,266 7.53 877,880 7.56
---------- ---------- ---------- ----------
Interest-bearing liabilities:
Savings .................................... 634,570 4.67 532,015 4.75
Borrowings ................................. 326,979 6.08 292,815 6.07
---------- ---------- ---------- ----------
Total average interest-bearing liabilities 961,549 5.15 824,830 5.22
---------- ---------- ---------- ----------
Average interest-free funds .................. $ 41,717 $ 53,050
========== ==========
Interest rate spread ......................... 2.38 2.34
Impact of interest-free funds ................ .21 .32
---------- ----------
Interest rate margin2 ........................ 2.59% 2.66%
========== ==========
<FN>
- ------------
1 Annualized
2 Net interest income divided by average interest-earning assets.
</FN>
10
Nine Months Ended
September 30,
----------------------------------
1996 1995
------------------------- ------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Rate 1 Balance Rate 1
------- ----- ------- -----
(Dollars in Thousands)
Net interest income .......................... $ 19,240 $ 17,941
======== ==========
Interest-earning assets:
Mortgage loans ............................. $687,618 7.89% $520,621 8.01%
Mortgage-backed securities ................. 218,148 6.46 270,199 6.74
Investments ................................ 59,388 6.41 63,913 6.38
-------- ---------- -------- ----------
Total average interest-earning assets .... 965,154 7.48 854,733 7.49
-------- ---------- -------- ----------
Interest-bearing liabilities:
Savings .................................... 615,819 4.64 520,938 4.48
Borrowings ................................. 304,469 5.90 283,211 5.91
-------- ---------- -------- ----------
Total average interest-bearing liabilities 920,288 5.05 804,149 4.98
-------- ---------- -------- ----------
Average interest-free funds .................. $ 44,866 $ 50,584
======== ==========
Interest rate spread ......................... 2.42 2.50
Impact of interest-free funds ................ .24 .30
-------- ----------
Interest rate margin2 ........................ 2.66% 2.80%
======== ==========
<FN>
- -------------
1 Annualized
2 Net interest income divided by average interest-earning assets.
</FN>
11
Net interest income increased by $666,000, or 11.42%, from $5.8 million
for the third quarter of 1995 to $6.5 million for the third quarter of 1996.
This increase was due to an increase in average interest-earning assets of
14.3%, offset partially by a 16.6% increase in average interest-bearing
liabilities and a declining interest rate margin of 2.59% for the quarter ended
September 30, 1996 from 2.66% for the quarter ended September 30, 1995. The
principal source of this growth in average interest-earning assets was an
increase in originations of mortgage and consumer loans which was funded by
increases in deposit liabilities and borrowings. The net interest rate margin
declined for the quarter because of the rise in interest rates during the first
half of 1996, coupled with a greater reliance on borrowings for funding. This
increase in market interest rates had the effect of increasing the average cost
of deposits faster than the average interest rates earned on the Company's
assets.
Total interest and dividend income was $18.9 million for the three months
ended September 30, 1996, an increase of $2.3 million, or 13.8%, from $16.6
million for the same period in 1995. This increase resulted primarily from an
increase of $125.4 million in the average balance of interest-earning assets,
partially offset by a 3 basis point decrease in the weighted average yield on
interest-bearing assets.
Interest expense was $12.4 million for the three months ended September
30, 1996, an increase of $1.6 million, or 15.0%, from the $10.8 million for the
three months ended September 30, 1995. This increase was due to an increase in
average interest-bearing liabilities of $136.7 million for the period partially
offset by a decrease in the average cost of funds of 7 basis points from 5.22%
at September 30, 1995 to 5.15% at September 30, 1996. This decrease in cost of
funds was primarily due to the repricing of deposits to lower rates during the
quarter.
A provision of $90,000 was recorded for losses on loans for the third
quarter of 1996 as compared with no provision for the same period in 1995. The
provision was recorded primarily because of a continuing increase in commercial
and consumer loan originations which inherently have a higher risk level than
residential real estate loans. Originations of commercial and consumer loans
were $5.2 million and $55.5 million for the third quarter of 1996, respectively,
as compared to $0.0 and $16.4 million, respectively, for the third quarter of
1995. The primary component of the significant increase in consumer loan
originations is manufactured home loans. The provision for 1996 reflects the
Company's evaluation of the loan portfolio and the increased emphasis on
consumer loan originations. The reserves for loan losses are analyzed on an
ongoing basis and the adequacy of the reserves are determined by a detailed
review of problem loans and real estate owned as well as the historical trends
in the losses on the various types of loans. See "Non-performing Assets and Loan
Loss Reserves" for further information on the provisions and analysis of loan
loss reserves.
Total non-interest income was $4.9 million for the three months ended
September 30, 1996, up 335.5% from $1.1 million for the same period in 1995.
This increase was due primarily to a $2.6 million increase in manufactured
housing brokerage fees and a $1.4 million increase in retail banking fees. On
April 3, 1996, the Company completed its acquisition of MCi. (See footnote 6 to
the financial statements.) The $2.6 million in manufactured housing brokerage
fees represents the commissions earned by MCi from brokerage of loans to
financial institutions. During the quarter ended September 30, 1996, MCi
brokered $77.1 million in manufactured housing contracts to financial
institutions which represents a 294% increase from the $26.2 million brokered
during the comparable period of 1995. This increase was due partially to MCi's
geographic expansion in late 1995, and partially to a stronger market for
manufactured homes. The increase in retail deposit fees for the third quarter
was primarily due to the growth in new checking accounts as a result of a new
marketing program initiated by the Association during June 1995 to increase the
percentage of deposits that are considered core deposits, as well as from
servicing income from sold loans.
12
Total operating expenses during the three months ended September 30, 1996
were $6.7 million as compared to $3.5 million for the same period in 1995, an
increase of $3.2 million, or 89.6%. The increase in total operating expense was
due primarily to the addition of MCi's operating expenses. MCi had operating
expenses, comprised primarily of compensation and related benefits, professional
fees, and other operating expenses of $2.1 million. The remaining increase in
total operating expense was due primarily to increases in compensation and
benefits, premises and equipment, state taxes and other operating expenses.
The increase in compensation and benefits for the third quarter of 1996
from the third quarter of 1995 was due to the addition of new employees for a
new branch which opened in Orrville, Ohio during the first quarter of 1996, and
the addition of new employees to start up a commercial lending division within
the Company. Premises and equipment expenses increased also primarily because of
the new branch opening in Orrville. The increase in state taxes is primarily due
to an increase in the equity of the Company as the state tax is basically a
fixed percentage of that equity. Other expenses increased primarily due to
marketing and advertising costs associated with the new high performance
checking marketing campaign and also due to increased loan origination expenses
as a result of an increase in the volume of loans closed during the third
quarter of 1996. Overall, the Company's operating expenses to average assets
ratio was 3.59% for the third quarter of 1996 as compared to 1.51% for the same
period in 1995. The significant increase in the ratio of operating expenses to
average total assets is comprised of the three components addressed above:
first, the one-time SAIF assessment; second, the addition of MCi operating
expenses; and third, the general increase in operating expenses at the
Association due to new business lines.
Operating expenses to average total assets....................... 3.59%
Increase due to SAIF assessment.................................. 1.12%
Increase due to MCi operating expenses........................... .76%
-----
1.71%
Third quarter 1995 operating expense to average total assets..... 1.51%
-----
Increase due primarily to new business lines..................... .20%
=====
The addition of MCi's earnings and operating expenses, combined with a
relatively small addition of assets and liabilities, results in a significant
change in the Company's financial ratios, including its ratio of operating
expenses to average total assets. As such, a more appropriate measure of the
Company's efficiency is the ratio of operating expenses, less non-interest
income, to net interest income. This ratio is known as the overhead ratio. The
Company's overhead ratio for the third quarter of 1996, excluding the SAIF
assessment, was 24.7% as compared to 48.6% for the same period of 1995.
Income tax expense decreased by $662,000, or 56.6%, for the three months
ended September 30, 1996 in comparison to the same period in 1995. Excluding the
effect of the SAIF assessment, income tax expense increased 43.4% to $1.7
million. The increase was a result of the 34.5% increase in pre-tax earnings.
The increase in the effective income tax rate from approximately 34% in 1995 to
approximately 37% for 1996 was due primarily to the non-deductibility of the
goodwill from the MCi acquisition.
Asset/Liability Management
The primary objective of interest rate risk management is to maintain a
balance between the stability of net interest income and the risks of changing
market interest rates. The primary measure of the Company's vulnerability to
changing interest rates is the interest-rate sensitivity gap, or the difference
between assets and liabilities scheduled to mature or reprice within a specific
period. The one year interest rate sensitivity gap as a percentage of total
assets was -7.66 at September 30, 1996
13
as compared to a positive 2.8% at December 31, 1995. The increase in the
interest-rate sensitivity gap was due to the lag in repricing of
interest-earning assets as compared to the repricing of the interest-bearing
liabilities plus the origination of an increased share of fixed rate loans
during the quarter which were funded by shorter-term deposits.
In managing its interest-rate sensitivity gap position, FirstFederal
emphasizes the origination and retention of adjustable-rate mortgage loans and
mortgage-backed securities, consumer loans and home equity loans and 10 and 15
year fixed-rate mortgage loans. FirstFederal also attempts to maintain a large
base of core deposits, emphasizes certificate of deposit accounts with
maturities of two years or greater and utilizes longer-term Federal Home Loan
Bank ("FHLB") advances to assist in managing interest rate risk. The Company
strives to maintain a position of neutrality between the maturities of its
interest-earning assets and interest-bearing liabilities. This results in more
stabilized net interest margins in periods of either rising or falling interest
rates.
Financial Condition
Total assets of the Company increased by $163.5 million, or 17.3%, from
$947.3 million at December 31, 1995 to $1.1 billion at September 30, 1996. This
increase was primarily from an increase in total loans of $226.9 million offset
partially by a decline in mortgage-backed and investment securities. This growth
was funded by a $64.3 million increase in deposit liabilities and a $85.9
million increase in borrowings.
First mortgage loans and loans held for sale increased $226.9 million, or
39.0%, to $808.0 million at September 30, 1996 from $581.1 million at December
31, 1995. The increase in the loan portfolio was due to increased loan
originations during the first nine months of the year. Originations of both
mortgage and consumer loans were $396.6 million for the nine months ended
September 30, 1996, an increase of $245.6 million, or 162.6%, over the $151.0
million in originations for the same period in 1995. The increase in
originations was due to lower mortgage interest rates during the period,
increased originations of consumer loans, primarily manufactured housing loans,
and an increase in residential mortgage originations from third party
correspondents.
Mortgage-backed securities available for sale declined by $74.3 million,
or 42.5%, and investment securities available for sale declined by $17.3
million, or 41.3%, for the nine months ended September 30, 1996 due to the sale
of securities to partially fund the increase in loans.
Total deposits increased by $64.3 million, or 11.2%, to $638.4 million at
September 30, 1996 from $574.0 million at December 31, 1995. Of the $64.3
million increase, $26.6 million was from the assumption of deposit liabilities
from the purchase of the Peoples National Bank branch. The other $37.7 million
increase came from a new branch opened in Orrville, increased core deposit
accounts from the new checking account promotion and other retail certificates
of deposit.
Total advances from the Federal Home Loan Bank (the "FHLB") and other
borrowings increased by $85.9 million, or 30.0%, during the nine months ended
September 30, 1996. The increase was due to the strong loan demand during the
nine months ended September 30, 1996. Advances and other borrowings may
fluctuate significantly depending upon loan demand and the Company's
asset/liability strategy.
Shareholders' equity increased by $5.9 million, or 7.6%, from $76.5
million at December 31, 1995 to $82.4 million, or 7.4% of total assets, at
September 30, 1996. The increase in shareholders' equity was attributable to the
issuance of 307,386 shares of common stock, valued at $5.6 million, in
connection with the acquisition of MCi, as well as to net earnings for the nine
months ended September 30, 1996 of $6.7 million. These increases were partially
offset by the payment of dividends on, and
14
by repurchases of, both the common and preferred stocks of the Company. Also
contributing to the decline in equity was an additional unrealized loss on
securities available for sale at September 30, 1996.
Non-Performing Assets and Loan Loss Reserves
Management reviews delinquent loans on an ongoing basis in order to
determine the collectability of both interest and principal. The Company's
non-performing and restructured assets decreased by $0.1 million to $1.8 million
at September 30, 1996 from $1.9 million at December 31, 1995. The ratio of
non-performing and restructured assets to total assets was .16% at September 30,
1996 as compared to .20% at December 31, 1995. The decline reflects an improving
Ohio economy as well as continued attention paid to collections and asset
dispositions.
The table below sets forth the amounts and categories of risk elements in
FirstFederal's loan portfolio. Non-performing assets include non-accrual loans,
restructured loans and assets acquired in settlement of loans. Loans are placed
on non-accrual status when the collection of principal or interest becomes
doubtful. In addition, one-to-four family residential mortgage loans and
multifamily residential 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.
09/30/96 06/30/96 03/31/96 12/31/95 09/30/95
-------- -------- -------- -------- --------
(Dollars in Thousands)
Total non-accruing loans $ 1,253 $ 642 $1,107 $1,425 $1,083
Assets acquired in settlement of loans 233 231 90 99 17
Restructured loans 340 340 341 366 362
------ ------ ----- ----- -----
Total non-performing and
restructured assets $1,826 $1,213 $1,538 $1,890 $1,462
===== ===== ===== ===== =====
Total non-performing and restructured
assets as a percentage of total assets .16% .12% .15% .20% .16%
==== ==== ==== ==== ====
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 had set aside $2.8 million at September
30, 1996 in reserves to cover potential losses, representing 155% 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 September 30, 1996 was 8.1%, which was in excess of the
regulatory requirement, compared to 11.9% at December 31, 1995. The decline in
the liquidity ratio was due principally to the use of funds from investment
securities that had matured or been sold to originate mortgage and consumer
loans.
15
The Association's primary sources of funds include loan and
mortgage-backed security repayments or sales, sales of loans, advances from the
FHLB of Cincinnati and deposit inflows. If the Association requires funds beyond
its ability to generate them internally, the Association has additional
borrowing capacity with the FHLB and collateral eligible for reverse repurchase
agreements. The Association uses particular sources of funds based upon
comparative costs and availability. The Association anticipates that it has
adequate liquidity and additional sources of funds to meet all of its
foreseeable commitments (see Note 2 of the notes to consolidated financial
statements).
At September 30, 1996, the Association exceeded all fully phased-in
minimum capital requirements established by the OTS. The management of the
Association is not aware of any proposed regulation or recommendation by the
OTS, which, if implemented, would have a material effect upon the Association.
The Association's capital ratios at September 30, 1996 are set forth below.
OTS Requirement Association Ratio
--------------- -----------------
Tangible Capital 1.5% 5.90%
Leverage (Core) Capital 3.0% 5.90%
Risk-based Capital 8.0% 11.19%
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 September 30,
1996 were 5.90%, 10.75% and 11.19%, 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 September 30, 1996, as well as the Association's level of risk-based
capital, management believes that this regulation will not affect the
Association's compliance with its risk-based capital requirements.
Regulatory Action Regarding Insurance Assessments
As a savings and loan association the Bank is insured by the Savings
Association Insurance Fund ("SAIF"). State commercial banks and national banks
are insured by the Bank Insurance Fund ("BIF"). Although both the BIF and SAIF
are administered by the FDIC, BIF and SAIF insurance premium assessment rates
have not remained comparable. Under the current assessment rate structure, BIF
members generally pay lower premiums than SAIF-insured institutions, placing
SAIF-insured institutions, including First Federal at a competitive disadvantage
to institutions whose deposits are exclusively or primarily BIF-insured. The
disparity between BIF and SAIF assessment rates was created after BIF reached
its required reserve ration during May 1995 resulting in a reduction of BIF
assessment rates. At the time assessment rates were determined for the period
beginning January 1, 1996 and effective through December 31, 1996, SAIF was not
predicted to reach its required reserve ratio until the year 2001. As a result,
the SAIF rates were not adjusted.
As a result of this disparity in insurance premium rates, on September
30, 1996, President Clinton signed into law an omnibus budget reconciliation
bill (the "Omnibus Bill") which includes provisions designed to recapitalize the
SAIF and to mitigate the BIF/SAIF premium disparity. The Omnibus Bill
16
requires the FDIC to impose a special assessment on SAIF-insured deposits held
by institutions as of March 31, 1995. The FDIC has announced that the special
assessment rate will be set at 65.7 basis points. Based upon insured deposits on
March 31, 1995 and an assessment rate of 0.657%, First Federal will pay an
assessment of $3.3 million on November 27, 1996 from the working capital of the
Bank. When the SAIF reaches its required reserve ratio following the one-time
assessment, the FDIC has indicated that it will reduce the annual assessment
rates for SAIF-insured institutions.
In addition, the Omnibus Bill requires the merger of the BIF and SAIF
into a single insurance fund no later than January 1, 1999 if no savings
association then exists. In connection with the merger of the funds, it is
possible that SAIF-insured institutions will be required to convert their
charters into state bank charters or national bank charters. If such a proposal
became law, the Company could be subject to capital requirements. The Company is
not currently subject to such requirements.
17
PART II. OTHER INFORMATION
- -------------------------------
Item 5. Other Information
Dividend
On October 18, 1996, the Company announced a quarterly cash
dividend of $.12 per common share. The dividend will be payable on
November 22, 1996 to shareholders of record as of November 4,
1996.
In addition, the Board declared dividends of $.4375 per share on
the Cumulative Convertible, Series A, Preferred stock and $.40625
per share on the Cumulative Convertible, Series B, Preferred
stock. These dividends will be paid on December 2, 1996 to
shareholders of record as of November 11, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) On August 27, 1996, the Company filed a Current Report on
Form 8-K disclosing a change in its Certifying Accountants
and filed an amendment on Form 8-K/A to such Report on
September 9, 1996.
All other items have been omitted as not required and not applicable under the
instructions.
18
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 November 12, 1996 /s/ GARY G. CLARK
----------------------- --------------------------------
Gary G. Clark
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date November 12, 1996 /s/ JAMES J. LITTLE
----------------------- --------------------------------
James J. Little
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
20