<PAGE>
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, 1996
----------------------------------
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 (IRS Employer Identification No.)
incorporation or organization)
135 East Liberty Street, Wooster, Ohio 44691
- - -------------------------------------- -----------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (216) 264-8001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1.00 par value 3,257,092
- - ----------------------------- -------------------------------------
(Class) (Shares Outstanding at May 10, 1996)
This Form 10-Q contains 16 pages.
(No Exhibit Index)
<PAGE>
FirstFederal Financial Services Corp
Table of Contents
- - --------------------------------------------------------------------------------
Page
----
Part I. Financial Information
Consolidated Statements of Financial Condition as of March
31, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
Part II. Other Information 14
Signatures 15
Exhibit 16
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2
<PAGE>
Part I. Financial Information
- - ------------------------------
FirstFederal Financial Services Corp
and Subsidiary
Consolidated Statements of Financial Condition
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 (1)
Assets (unaudited)
- - ------ ----------- ------------
<S> <C> <C>
Cash on hand and in other financial institutions $ 21,994 $ 18,621
Interest-bearing deposits in other financial
institutions 7,573 8,862
-------- --------
Total cash and cash equivalents 29,567 27,483
Investment securities:
Available for sale (Amortized cost of $36,463
and $41,720, respectively) 36,364 41,953
Held to maturity (Fair value of $5,622 and
$3,737, respectively) 5,725 3,795
Mortgage-backed securities:
Available for sale (Amortized cost of $159,798
and $174,981, respectively) 158,683 174,974
Held to maturity (Fair value of $88,111 and
$85,847, respectively) 89,772 86,147
Loans held for sale 19,168 36,664
First mortgage and other loans, net 619,394 544,396
Accrued interest receivable 5,976 6,284
Stock in Federal Home Loan Bank of Cincinnati, at
cost 14,419 14,172
Premises and equipment, net 7,556 7,442
Other assets 6,835 3,960
-------- --------
$993,459 $947,270
======== ========
Liabilities and Shareholders' Equity
- - ------------------------------------
Deposits $619,021 $574,041
Advances from the Federal Home Loan Bank and
other borrowings 284,095 286,726
Advance payments by borrowers for taxes and
insurance 2,072 3,714
Accrued expenses and other liabilities 11,499 6,256
-------- --------
Total Liabilities 916,687 870,737
-------- --------
Shareholders' Equity:
Serial preferred stock, no par value:
authorized 1,500,000 shares; Series A, 528,847
and 538,847 shares issued and outstanding,
respectively, Series B, 496,500 shares issued
and outstanding 23,875 24,132
Common stock, $1.00 par value; authorized
20,000,000 shares; issued and outstanding
3,405,176 shares 3,405 3,405
Paid-in capital 16,010 16,310
Retained earnings 37,098 35,338
Treasury stock, at cost (427,526 and 430,801
shares, respectively) (2,827) (2,799)
Unrealized gain (loss) on securities available for
sale (789) 147
-------- --------
76,772 76,533
-------- --------
$993,459 $947,270
======== ========
</TABLE>
(1) Derived from audited financial statements at December 31, 1995.
See accompanying notes to consolidated financial statements.
3
<PAGE>
FirstFederal Financial Services Corp
and Subsidiary
Consolidated Statements of Operations (Unaudited)
(In thousands except per share information)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Interest and dividend income:
Loans $12,095 $ 9,891
Mortgage-backed securities 4,158 4,616
Investment securities and other interest income 771 621
Dividends on stock in Federal Home Loan Bank of
Cincinnati 247 208
------ ------
Total interest and dividend income 17,271 15,336
------ ------
Interest expense:
Deposits 6,818 5,337
Borrowings 4,207 3,923
------ ------
Total interest expense 11,025 9,260
------ ------
Net interest income 6,246 6,076
Provision for losses on loans 90 -
------ ------
Net interest income after provision 6,156 6,076
------ ------
Other income:
Net gains on sales of loans 433 114
Net gains on sales of investments and mortgage-backed
securities 275 104
Other operating income 851 509
------ ------
Total other income 1,559 727
------ ------
Operating expenses:
Compensation and related benefits 1,564 1,398
Premises & equipment 448 411
Federal insurance premium 314 289
Professional and other fees 229 186
State taxes 296 233
Other operating expenses 974 676
------ ------
Total operating expenses 3,825 3,193
------ ------
Earnings before Federal income taxes 3,890 3,610
Federal income taxes 1,338 1,258
------ ------
Net earnings $ 2,552 $ 2,352
====== ======
Net earnings applicable to common stock $ 2,117 $ 1,897
====== ======
Net earnings per common share (Note 3)
Primary $ .64 $ .57
Fully diluted $ .48 $ .45
Weighted average number of shares outstanding:
Primary 3,307,223 3,297,221
Fully diluted 5,263,547 5,356,722
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FirstFederal Financial Services Corp
and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,552 $ 2,352
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provisions for losses on loans 90 -
Net gains from sales (708) (218)
Accretion of discounts, amortization of premiums and
depreciation, net 224 299
Proceeds from sale of loans held for sale 15,076 13,018
Disbursements for loans held for sale (20,647) (13,821)
Other 5,341 2,307
-------- --------
Net cash provided by operating activities 1,928 3,937
-------- --------
Cash flows from investing activities:
Loans originated (93,142) (30,078)
Principal repayments of mortgage and other loans 41,856 12,825
Proceeds from:
Mortgage-backed securities repayments and sales
Available for sale 35,679 12,849
Held to maturity 3,320 2,592
Investment securities repayments and sales
Available for sale 20,868 2,722
Held to maturity 70 74
Assets acquired in settlement of loan sales 37 12
Purchases of:
Mortgage-backed securities
Available for sale (20,337) -
Held to maturity (6,945) -
Investment securities
Available for sale (15,495) (10,000)
Held to maturity (2,000) -
Net cash received in acquisition 23,670 -
Purchase of premises and equipment, net (328) (210)
-------- --------
Net cash used by investing activities (12,747) (9,214)
-------- --------
Cash flows from financing activities:
Net increase in deposits 18,553 5,662
Proceeds from Federal Home Loan Bank advances 43,800 56,300
Repayments on Federal Home Loan Bank advances (51,795) (37,144)
Net proceeds from securities sold under agreement to
repurchase 5,364 (9,775)
Net decrease in advance payments by borrowers for taxes
and insurance (1,642) (1,423)
Repurchase of common and preferred stock (705) -
Proceeds from common stock transactions 120 41
Payment of cash dividends (792) (780)
-------- --------
Net cash provided by financing activities 12,903 12,881
-------- --------
Net increase in cash & cash equivalents 2,084 7,604
Cash and cash equivalents at beginning of year 27,483 10,951
-------- --------
Cash and cash equivalents at end of period $ 29,567 $ 18,555
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FirstFederal Financial Services Corp
and Subsidiary
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 subsidiary, 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 March 31, 1996 and December 31, 1995, and the results of
its operations for the three months ended March 31, 1996 and 1995, and its
cash flows for the three months ended March 31, 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 March 31, 1996, the Association had outstanding commitments to
originate mortgage loans aggregating approximately $38.2 million. There were
no outstanding commitments to sell mortgage loans at March 31, 1996.
Outstanding commitments to purchase mortgage-backed securities or other
investment securities were $693,000 at March 31, 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 a 10%
common stock dividend granted to the shareholders of record on May 2, 1995.
On April 17, 1996, the Board of Directors declared a 10% common stock dividend
to the shareholders of record on May 2, 1996. All share and per share data
presented herein have been restated for the effect of the stock dividend in
1995 and 1996. The primary earnings per share and fully diluted earnings per
share of $.70 and $.53 for the three months ended March 31, 1996 previously
announced to the shareholders and the public have been restated to $.64 and
$.48, respectively.
6
<PAGE>
FirstFederal Financial Services Corp
and Subsidiary
Notes to Consolidated Financial Statements
(4) Cash Dividends on Common and Preferred Stock
On January 23, 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 February 22, 1996 to shareholders of record
as of February 2, 1996. The Series A preferred dividend of $.4375 per share
was paid on March 1, 1996 to shareholders of record as of February 12, 1996
and the Series B preferred dividend of $.40625 per share was also paid on
March 1, 1996 to shareholders of record as of February 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) Acquisition
On March 23, 1996, the Association acquired a branch in Mt. Vernon,
Ohio from Peoples National Bank, Wooster, Ohio. The Association assumed
deposit liabilities of $26.6 million and acquired fixed assets, deposit loans
and cash. The purchase of the branch was accounted for by the purchase method
and, accordingly, the assets and liabilities were recorded at their estimated
fair value at the date of acquisition. The purchase resulted in a cost in
excess of fair value of net assets of $2.4 million, which will be amortized by
the straight-line method over ten years. The former Peoples branch has been
closed and the deposits transferred to the existing Mt. Vernon branch on South
Main Street.
7
<PAGE>
FirstFederal Financial Services Corp
and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Results of Operations
---------------------
Net earnings for the first quarter of 1996 totaled $2.6 million, an
increase of 8.5% over the $2.4 million earned in the same quarter of 1995. On
a per share basis, net earnings of $.64 for the first quarter of 1996
increased 12.3% over the $.57 earned during the same period in 1995. The
improvement in earnings is primarily attributable to an increase in net
interest income, gains on sales of loans and securities and other income
partially offset by increases in operating expenses. The annualized return on
average assets for the three month period ended March 31, 1996 was 1.07% as
compared to 1.12% for the same period in 1995. The annualized return on
average shareholder's equity for the three month period ended March 31, 1996
was 13.32% as compared to 13.30% for the same period in 1995.
FirstFederal's net earnings are primarily dependent upon the
difference between interest earned on interest-earning assets and interest
paid on interest-bearing liabilities. Net interest income depends upon the
volume of interest-earning assets and interest-bearing liabilities and the
interest rate earned or paid, respectively. Net earnings are also affected by
the Company's non-interest income and by its non-interest expenses.
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.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------------
1996 1995
--------------------------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Rate/1/ Balance Rate/1/
----------- -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net interest income $ 6,246 $ 6,076
======== ========
Interest-earning assets:
Mortgage loans $601,678 8.04% $488,715 8.10%
Mortgage-backed securities 260,065 6.40 282,252 6.54
Investments 58,468 6.96 48,363 6.86
-------- ----- -------- ----
Total average
interest-earning assets 920,211 7.51 819,330 7.49
-------- ----- -------- ----
Interest-bearing liabilities:
Savings 581,090 4.71 502,097 4.31
Borrowings 289,507 5.82 268,541 5.92
-------- ----- -------- ----
Total average
interest-bearing
liabilities 870,597 5.08 770,638 4.87
-------- ----- -------- ----
Average interest-free funds $ 49,614 $ 48,692
======== ========
Interest rate spread 2.43 2.62
Impact of interest-free funds .29 .35
----- ----
Interest rate margin/2/ 2.72% 2.97%
===== ====
- - --------------------
</TABLE>
/1/Annualized
/2/Net interest income divided by average interest-earning assets.
8
<PAGE>
Net interest income increased by $170,000, or 2.8% from $6.1 million for
the first quarter of 1995 to $6.2 million for the first quarter of 1996. Net
interest income increased due to an increase in average interest-earning
assets of 12.3%, offset partially by a smaller increase in average interest-
bearing liabilities and a declining interest rate margin to 2.72% at March 31,
1996 from 2.97% at March 31, 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 1995. 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 $17.3 million for the three
months ended March 31, 1996, an increase of $2.0 million, or 12.6%, from $15.3
million for the same period in 1995. This increase resulted primarily from an
increase of $100.9 million in the average balance of interest-earning assets,
as well as a 2 basis point increase in the weighted average yield on interest-
bearing assets.
Interest expense was $11.0 million for the three months ended March 31,
1996, an increase of $1.7 million, or 19.1%, from the $9.3 million for the
three months ended March 31, 1995. This increase was due to an increase in
average interest-bearing liabilities of $100.0 million for the period plus an
increase in the average cost of funds from 4.87% at March 31, 1995 to 5.08% at
March 31, 1996. This 21 basis points increase in cost of funds was primarily
due to rising market interest rates for certificate of deposits and the
transfer of funds from regular passbook savings to certificates of deposit.
A provision of $90,000 was recorded for losses on loans for the first
quarter of 1996 as compared with no provision for the same period in 1995.
The provision was due primarily to a continuing increase in consumer loan
originations which inherently have a higher risk level. Originations of
consumer loans were $19.1 million for the first quarter of 1996 as compared to
$7.2 million for the first quarter of 1995. The provision for 1996 reflects
the Company's evaluation of the loan portfolio and the increased emphasis on
consumer loan originations. The reserves for loan losses are analyzed on an
ongoing basis and the adequacy of the reserves are determined by a detailed
review of problem loans and real estate owned as well as the historical trends
in the losses on the various types of loans. See "Non-performing Assets and
Loan Loss Reserves" for further information on the provisions and analysis of
loan loss reserves.
Total non-interest income was $1.6 million for the three months ended
March 31, 1996, up 14.4% from the $727,000 for the same period in 1995. This
increase was due to a $490,000 increase in gains on sale of loans and
mortgage-backed securities and a $342,000 increase in retail banking fees.
The increase in gains was attributable to increased loan sales and the change
in accounting for servicing rights according to SFAS No. 122. Under SFAS No.
122 the Company must allocate the cost of loans originated for sale to both
mortgage servicing rights and the loan (without servicing rights) based on
their relative fair values. This has increased the initial gain on sale but
leads to increased write-offs of this servicing asset over the estimated life
of the loan. The increase in retail deposit fees for the first quarter was
primarily due to the growth in new checking accounts as a result of a new
marketing program initiated by the Association during June, 1995 to increase
the percentage of deposits that are considered core deposits.
9
<PAGE>
Total operating expenses during the three months ended March 31, 1996
were $3.8 million as compared to $3.2 million for the same period in 1995, an
increase of $.6 million, or 19.8%. The 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 first quarter of 1996
over 1995 was due to the addition of new employees for a new branch which
opened in Orrville during the first quarter of 1996, and the addition of new
employees to start up a commercial lending division within the Company.
Premises and equipment expenses increased also primarily because of the new
branch opening in Orrville. The increase in state taxes is primarily due to
an increase in the equity of the Company as the state tax is basically a fixed
percentage of that equity. Other expenses increased primarily due to
marketing and advertising costs associated with the new high performance
checking marketing campaign and also due to increased loan origination
expenses as a result of an increase in the volume of loans closed during the
first quarter of 1996. Overall the Company's operating expenses to average
assets ratio was 1.60% for the first quarter of 1996 as compared to 1.52% for
the same period in 1995.
Income tax expense increased by $80,000, or 6.4%, for the three months
ended March 31, 1996 in comparison to the same period in 1995. The increase
was a result of the 7.8% increase in pre-tax earnings. The effective income
tax rate was approximately 34% for both periods.
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. One measure of the Company's vulnerability to changing
interest rates is the percentage of loans and mortgage-backed securities that
are adjustable or short-term in nature, as such assets adjust more quickly to
changes in interest rates. The percentage of FirstFederal's loans and
mortgage-backed securities that are adjustable-rate or short-term increased
from 49.6% at December 31, 1995 to 50.3% at March 31, 1996. This increase was
due primarily to the continued emphasis on maintaining adjustable-rate
products in the portfolio. The increased originations of consumer loans which
are shorter-term in nature also contributed to the increased ratio.
A second measure of the vulnerability to changing interest rates is the
interest-rate sensitivity gap, or the difference between assets and
liabilities scheduled to mature or reprice within a specific period. The one
year interest rate sensitivity gap as a percentage of total assets was a
negative 7.5% at March 31, 1996 as compared to a positive 2.8% at December 31,
1995. The increase in the interest-rate sensitivity gap is due to the lag in
repricing of interest-earning assets as compared to the repricing of the
interest-bearing liabilities plus the origination of an increased share of
fixed rate loans during the quarter which were funded by shorter-term
deposits.
In managing its interest-rate sensitivity gap position, FirstFederal
emphasizes the origination and retention of adjustable-rate mortgage loans and
mortgage-backed securities, consumer loans and home equity loans and 10 and 15
year fixed-rate mortgage loans. FirstFederal also attempts to maintain a
large base of core deposits, emphasizes certificate of deposit accounts with
maturities of two years or greater and utilizes longer-term Federal Home Loan
Bank ("FHLB") advances to assist in managing interest rate risk. The
Corporation strives to maintain a position of neutrality between the
maturities of its interest-earning assets and interest-bearing liabilities.
This results in more stabilized net interest margins in periods of either
rising or falling interest rates.
10
<PAGE>
Financial Condition
-------------------
Total assets of the Corporation increased by $46.2 million, or 4.9%,
from $947.3 million at December 31, 1995 to $993.5 million at March 31, 1996.
This increase was primarily from an increase in total loans of $57.5 million
offset partially by a decline in mortgage-backed securities. This growth was
funded by a $45.0 million increase in deposit liabilities.
Total cash and cash equivalents increased by $2.1 million, or 7.6%,
primarily due to the partial use of funds from the Mount Vernon branch
purchase to increase liquidity while the majority of these funds went to loan
originations.
First mortgage loans and loans held for sale increased $57.5 million, or
9.9% to $638.6 million at March 31, 1996 from $581.1 million at December 31,
1995. The increase in the loan portfolio was due to increased loan
originations during the first quarter. Originations of both mortgage and
consumer loans were $113.8 million for the three months ended March 31, 1996,
an increase of $69.9 million, or 159.2%, over the $43.9 million in
originations for the same period in 1995. The increase in originations was
due to lower mortgage interest rates during January and February, increased
originations of consumer loans and an increase in residential mortgage
originations from third party correspondents.
Mortgage-backed securities available for sale declined by $16.3 million,
or 9.3%, for the first quarter of 1996 due to the sale of securities to
partially fund the increase in loans.
Total deposits increased by $45.0 million, or 7.8%, to $619.0 million at
March 31, 1996 from $574.0 million at December 31, 1995. Of the $45.0 million
increase, $26.6 million was from the assumptions of deposit liabilities from
the purchase of the Peoples National Bank branch. The other $18.4 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 declined by $2.6 million or .9% during the three months ended March
31, 1996. The decline was due to repayments on advances at the FHLB.
Advances and other borrowings may fluctuate significantly depending upon loan
demand and the Corporation's asset/liability strategy.
Shareholders' equity increased by $239,000, or .3%, from $76.5 million
at December 31, 1995 to $76.8 million, or 7.7% of total assets, at March 31,
1996. The increase in shareholders' equity was attributable to net earnings
for the first quarter of 1996 offset in part by the payment of dividends on
both the common and preferred stocks of the Company. Also contributing to a
decline in equity was an additional unrealized loss on securities available
for sale at March 31, 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 $352,000 to $1.5 million
at March 31, 1996 from $1.9 million at December 31, 1995. The ratio of non-
performing and restructured assets to total assets was .15% at March 31, 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.
11
<PAGE>
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 or loans made at a rate materially less than
that of market rates.
<TABLE>
<CAPTION>
03/31/96 12/31/95 09/30/95 06/30/95 03/31/95
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total non-accruing loans $ 1,107 $ 1,425 $ 1,083 $ 550 $ 517
Assets acquired in settlement of loans 90 99 17 90 82
Restructured loans 341 366 362 347 349
--------- --------- --------- --------- ---------
Total non-performing and
restructured assets $ 1,538 $ 1,890 $ 1,462 $ 987 $ 948
========= ========= ========= ========= =========
Total non-performing and restructured
assets as a percentage of total assets .15% .20% .16% .11% .11%
========= ========= ========= ========= =========
</TABLE>
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 $3.0 million at March
31, 1996 in reserves to cover potential losses, representing 197% 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 March 31, 1996 was 10.2%, which was in excess of the
regulatory requirement, compared to 11.9% at December 31, 1995. The decline
in the liquidity ratio was due principally to the use of funds from
investment securities that had matured or been sold to originate mortgage and
consumer loans.
The Association's primary sources of funds include loan and
mortgage-backed security repayments or sales, sales of loans, advances from
the FHLB of Cincinnati and deposit inflows. If the Association requires funds
beyond its ability to generate them internally, the Association has additional
borrowing capacity with the FHLB and collateral eligible for reverse
repurchase agreements. The Association uses particular sources of funds based
upon comparative costs and availability. The Association anticipates that it
has adequate liquidity and additional sources of funds to meet all of its
foreseeable commitments (see Note 2 of the notes to consolidated financial
statements).
At March 31, 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 March 31, 1996 are set forth below.
12
<PAGE>
<TABLE>
<CAPTION>
OTS Requirement Association Ratio
---------------- ------------------
<S> <C> <C>
Tangible Capital 1.5% 6.30%
Leverage (Core) Capital 3.0% 6.30%
Risk-based Capital 8.0% 13.60%
</TABLE>
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
March 31, 1996 were 6.30%, 13.05% and 13.60%, respectively. As a result, the
Association meets the capital requirements of a well capitalized institution.
The Association's management believes that, under the current
regulations, the Association will continue to meet its capital requirements in
the coming year. Further changes to the capital regulations are possible,
however, which may affect the Association's financial position, or encourage a
change in asset size or mix. In particular, an interest-rate risk component
was incorporated into the risk-based capital framework, however, the OTS has
deferred the implementation of the regulation for an indefinite period of
time. Based on the Association's interest-rate risk profile and the level of
interest rates at March 31, 1996, as well as the Association's level of risk-
based capital, management believes that this regulation will not affect the
Association's compliance with its risk-based capital requirements.
Proposed Regulatory Action Regarding Insurance Assessments
----------------------------------------------------------
The deposits of savings associations such as the Association are
presently insured by the Savings Association Insurance Fund (the "SAIF"),
which, along with the Bank Insurance Fund (the "BIF"), is one of the two
insurance funds administered by the FDIC. Financial institutions which are
members of the BIF are experiencing substantially lower deposit insurance
premiums because the BIF has achieved its required level of reserves while the
SAIF has not yet achieved its required reserves. A recapitalization plan for
the SAIF under consideration by Congress reportedly provides for a special
assessment of 0.80% to 0.90% of deposits to be imposed on all SAIF insured
institutions to enable the SAIF to achieve its required level of reserves. If
the proposed assessment of 0.80% to 0.90% was effected based on deposits as of
March 31, 1995 (as proposed), the Association's special assessment would
amount to approximately $3.0 million after taxes. Accordingly, this special
assessment would significantly increase non-interest expense and adversely
affect the Company's results of operations. Conversely, depending upon the
Association's capital level and supervisory rating and assuming the insurance
premium levels for BIF and SAIF members are again equalized, future deposit
insurance premiums are expected to decrease significantly, to as low as 0.04%
from the 0.23% of deposits currently paid by the Association, which would
reduce non-interest expense for future periods.
13
<PAGE>
Part II. Other Information
-----------------------------------------------------------------------------
Item 5. Other Information
-----------------
Dividend
--------
On April 17, 1996, the Company announced a quarterly cash dividend
of $.12 per common share. Also the Company's Board of Directors
approved a 10% common stock dividend with the record and payment
dates the same as the cash dividend. The cash dividend will be paid
on post stock dividend shares. The dividends will be payable on May
22, 1996 to shareholders of record as of May 2, 1996.
In addition, the Board declared dividends of $.4375 per share on the
Cumulative Convertible, Series A, Preferred stock and $.40625 per
share on the Cumulative Convertible, Series B, Preferred stock.
These dividends will be paid on June 3, 1996 to shareholders of
record as of May 10, 1996.
Recent Developments
-------------------
On April 3, 1996, the Company announced the completion of its
acquisition of Mobile Consultants, Inc., of Alliance, Ohio. Mobile
Consultants originates and services loans on manufactured homes for
other financial institutions, and currently does business in 21
eastern states. Calendar year 1995 loan originations were $97
million and loans serviced by Mobile Consultants total in excess of
$330 million. The transaction is expected to be immediately
accretive to FirstFederal's earnings per share. The acquisition will
assist FirstFederal in diversifying its earnings and asset base.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) No reports on 8-K have been filed during the quarterly period
covered by this report.
All other items have been omitted as not required and not applicable under the
instructions.
14
<PAGE>
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)
/s/ Gary G. Clark
Date: May 13, 1996 ________________________________
Gary G. Clark
Chairman and President
(Duly Authorized Representative)
/s/ L. Dwight Douce
Date: May 13, 1996 ________________________________
L. Dwight Douce
Executive Vice President,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 21,994
<INT-BEARING-DEPOSITS> 7,573
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 195,047
<INVESTMENTS-CARRYING> 95,497
<INVESTMENTS-MARKET> 93,733
<LOANS> 638,562
<ALLOWANCE> 3,029
<TOTAL-ASSETS> 993,459
<DEPOSITS> 619,021
<SHORT-TERM> 55,336
<LIABILITIES-OTHER> 13,571
<LONG-TERM> 228,759
0
23,875
<COMMON> 3,405
<OTHER-SE> 49,492
<TOTAL-LIABILITIES-AND-EQUITY> 993,459
<INTEREST-LOAN> 12,095
<INTEREST-INVEST> 4,928
<INTEREST-OTHER> 247
<INTEREST-TOTAL> 17,271
<INTEREST-DEPOSIT> 6,818
<INTEREST-EXPENSE> 11,025
<INTEREST-INCOME-NET> 6,246
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 275
<EXPENSE-OTHER> 3,825
<INCOME-PRETAX> 3,890
<INCOME-PRE-EXTRAORDINARY> 2,552
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,552
<EPS-PRIMARY> .64
<EPS-DILUTED> .48
<YIELD-ACTUAL> 7.51
<LOANS-NON> 1,107
<LOANS-PAST> 0
<LOANS-TROUBLED> 341
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,994
<CHARGE-OFFS> 70
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 3,029
<ALLOWANCE-DOMESTIC> 3,029
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
