<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
-------------------------
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 incorporation (IRS Employer
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 4,588,459
- ----------------------------- --------------------------------------
(Class) (Shares Outstanding at March 31, 1997)
This Form 10-Q contains 18 pages.
(No Exhibit Index)
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FIRSTFEDERAL FINANCIAL SERVICES CORP
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Consolidated Statements of Financial Condition as of March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-8
Management's Discussion and Analysis of Financial Condition and Results of
Operations 9-14
PART II. OTHER INFORMATION 15
Signatures 16
Exhibit 27 Financial Data Schedule 17
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</TABLE>
2
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FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996(1)
ASSETS (UNAUDITED)
----------- -----------
<S> <C> <C>
Cash on hand and in other financial institutions $ 27,892 $ 26,012
Interest-bearing deposits in other financial
institutions 8,952 9,000
----------- -----------
Total cash and cash equivalents 36,844 35,012
Investment securities:
Available for sale (Amortized cost of $35,457 and $47,865,
respectively) 35,051 47,763
Held to maturity (Fair value of $6,006 and $6,238, respectively) 6,135 6,247
Mortgage-backed securities:
Available for sale (Amortized cost of $104,172 and $95,445,
respectively) 102,439 93,785
Held to maturity (Fair value of $73,747 and $77,720,
respectively) 75,779 78,737
Retained interest 13,556 6,491
Loans held for sale 57,971 87,071
Loans receivable, net 695,278 669,697
Accrued interest receivable 6,189 6,069
Stock in Federal Home Loan Bank of Cincinnati, at cost 17,786 17,485
Premises and equipment, net 10,665 10,386
Cost in excess of fair value of net assets acquired 10,233 10,572
Other assets 20,206 11,068
----------- -----------
$ 1,088,132 $ 1,080,383
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 662,680 $ 671,918
Advances from the Federal Home Loan Bank and
other borrowings 322,604 312,413
Advance payments by borrowers for taxes and insurance 594 1,937
Accrued expenses and other liabilities 14,348 8,828
----------- -----------
TOTAL LIABILITIES 1,000,226 995,096
----------- -----------
Shareholders' Equity:
Serial preferred stock, no par value:
authorized 1,500,000 shares; Series A, 498,287 and 498,287 shares issued
and outstanding, respectively, Series B, 454,797
and 479,327 shares issued and outstanding, respectively 22,079 22,693
Common stock, $1.00 par value; authorized 20,000,000
shares; issued and outstanding 4,052,757 and 4,053,194
shares, respectively 4,053 4,053
Paid-in capital 30,080 29,568
Retained earnings 35,510 32,796
Treasury stock, at cost (381,990 and 428,484 shares, respectively) (2,420) (2,677)
Unrealized gain (loss) on securities available for sale (1,396) (1,146)
----------- -----------
87,906 85,287
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$ 1,088,132 $ 1,080,383
=========== ===========
(1) Derived from audited financial statements at December 31, 1996.
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- ----------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans $ 14,544 $ 12,095
Mortgage-backed securities 2,717 4,158
Investment securities and other interest income 1,135 771
Dividends on stock in Federal Home Loan Bank of Cincinnati 302 247
---------- ----------
TOTAL INTEREST AND DIVIDEND INCOME 18,698 17,271
---------- ----------
INTEREST EXPENSE:
Deposits 7,662 6,818
Borrowings 4,642 4,207
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TOTAL INTEREST EXPENSE 12,304 11,025
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NET INTEREST INCOME 6,394 6,246
Provision for losses on loans 107 90
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NET INTEREST INCOME AFTER PROVISION 6,287 6,156
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OTHER INCOME:
Net gains on sales of loans 2,716 433
Net gains on sales of investments and mortgage-backed securities -- 275
Manufactured housing brokerage fees, net 639 --
Other operating income 2,676 851
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TOTAL OTHER INCOME 6,031 1,559
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OPERATING EXPENSES:
Compensation and related benefits 3,335 1,564
Premises & equipment 573 448
Federal insurance premium 104 314
Professional and other fees 309 229
State taxes 352 296
Other operating expenses 1,995 974
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TOTAL OPERATING EXPENSES 6,668 3,825
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Earnings before Income taxes 5,650 3,890
Income taxes 2,085 1,338
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NET EARNINGS $ 3,565 $ 2,552
========== ==========
NET EARNINGS APPLICABLE TO COMMON STOCK $ 3,158 $ 2,117
========== ==========
NET EARNINGS PER COMMON SHARE (NOTE 3)
PRIMARY $ .68 $ .51
FULLY DILUTED $ .51 $ .39
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
PRIMARY 4,649,998 4,134,029
FULLY DILUTED 6,933,870 6,579,434
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,565 $ 2,552
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provisions for losses on loans 107 90
Net gains from sales (2,716) (708)
Accretion of discounts, amortization of premiums and depreciation, net 416 224
Proceeds from sale of loans held for sale 74,646 15,076
Disbursements for loans held for sale (45,546) (20,647)
Other (3,520) 5,341
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Net cash provided by operating activities 26,952 1,928
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated (61,819) (93,142)
Principal repayments of mortgage and other loans 38,842 41,856
Proceeds from:
Mortgage-backed securities repayments and sales
Available for sale 3,701 35,679
Held to maturity 2,792 3,320
Investment securities repayments and sales
Available for sale 42,966 20,868
Held to maturity 7,504 70
Assets acquired in settlement of loan sales (19) 37
Purchases of:
Mortgage-backed securities
Available for sale (7,037) (20,337)
Held to maturity (5,309) (6,945)
Investment securities
Available for sale (32,295) (15,495)
Held to maturity (5,699) (2,000)
Net cash received in acquisitions -- 23,670
Net change in retained interest (7,065) --
Purchase of premises and equipment, net (595) (328)
-------- --------
Net cash used by investing activities (24,033) (12,747)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits (9,238) 18,553
Proceeds from Federal Home Loan Bank advances 11,002 43,800
Repayments on Federal Home Loan Bank advances (19,783) (51,795)
Net proceeds from other borrowings 18,972 5,364
Net decrease in advance payments by borrowers for taxes and insurance (1,343) (1,642)
Repurchase of common and preferred stock -- (705)
Proceeds from common stock transactions 154 120
Payment of cash dividends (851) (792)
-------- --------
Net cash provided by financing activities (1,087) 12,903
-------- --------
Net increase in cash & cash equivalents 1,832 2,084
Cash and cash equivalents at beginning of year 35,012 27,483
-------- --------
Cash and cash equivalents at end of period $ 36,844 $ 29,567
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information and the instructions to Form 10-Q. It is assumed that the
readers of these interim financial statements have read or have access to the
1996 Annual Report of FirstFederal Financial Services Corp ("FirstFederal" or
the "Company"). Therefore, only material changes in financial condition and
results of operations are discussed in Management's Discussion and Analysis. The
interim consolidated financial statements include the accounts of FirstFederal,
its subsidiaries, Mobile Consultants, Inc. (MCi) and First Federal Savings and
Loan Association of Wooster (the "Association") and the Association's
subsidiaries.
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, 1997 and December 31, 1996, and the results of its operations
for the three months ended March 31, 1997 and 1996, and its cash flows for the
three months ended March 31, 1997 and 1996. The results of operations for the
interim period reported herein are not necessarily indicative of results of
operations to be expected for the entire year. Financial statement
reclassifications have been made for 1996 to conform to classifications used in
1997.
(2) Commitments
At March 31, 1997, the Association had outstanding commitments to
originate loans aggregating approximately $19.7 million and outstanding
commitments to sell loans of $7.2 million. There were no outstanding commitments
to purchase or sell mortgage-backed securities or investment securities at March
31, 1997.
(3) Earnings Per Share of Common Stock
Primary earnings per share were computed based on the weighted average
number of common shares and common stock equivalent shares outstanding during
the period, after giving effect to the reduction of earnings by the dividend
paid on the Series A and Series B cumulative serial preferred stock. Exercisable
stock options are included as common share equivalents. The fully diluted
earnings per share assume the conversion of the Series A and Series B cumulative
serial preferred stock. Per share information has been adjusted to reflect the
10% common stock dividend granted to the shareholders of record on May 2, 1996.
On April 16, 1997, the Board of Directors declared a five-for-four stock split,
effected as a 25% stock dividend, granted to shareholders of record on May 2,
1997. All share and per share data presented herein have been restated for the
effect of the stock dividends in 1997 and 1996. The primary earnings per share
and fully diluted earnings per share of $.85 and $.64 for the three months ended
March 31, 1997 previously announced to shareholders and the public have been
restated to $.68 and $.51, respectively.
6
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FIRSTFEDERAL FINANCIAL SERVICES CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Cash Dividends on Common and Preferred Stock
On January 29, 1997, 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 21, 1997 to shareholders of record as of
February 8, 1997. The Series A preferred dividend of $.4375 per share and the
Series B preferred dividend of $.40625 per share were both paid on March 3, 1997
to shareholders of record as of February 8, 1997.
(5) Recently Issued Accounting Standards
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, is effective for The Corporation for
transactions occurring after December 31, 1996 and superseded SFAS No. 122,
Accounting for Mortgage Servicing Rights. SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. After a transfer of financial assets, SFAS No.
125 requires an entity to recognize the financial and servicing assets it
controls and the liabilities it has incurred, to derecognize financial assets
when control has been surrendered, and to derecognize liabilities when
extinguished. SFAS No. 125 did not have a material impact on the Corporation's
financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which
supersedes Accounting Principles Board (APB) No. 15, Earnings per Share, and
replaces the presentation of primary and fully diluted earnings per share with
basic and diluted earnings per share. SFAS No. 128 was issued to simplify the
computation of earnings per share and make the U. S. Standard more compatible
with the earnings per share standards of other countries and that of the
International Accounting Standards Committee (ISAC). SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. Earlier application is not permitted, however, pro forma
earnings per share is permitted for periods prior to required adoption. The
following table discloses pro forma EPS pursuant to SFAS No. 128 for the three
months ended March 31, 1997 and March 31, 1996.
<TABLE>
<CAPTION>
Three months ended March 31
1997 1996
-------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stockholders $3,158 4,571 $0.69 $2,117 4,071 $0.52
Effect of Dilutive Securities
Stock options 79 0.01 63 0.01
Convertible Preferred Stock 2,284 0.17 2,445 0.12
Diluted EPS
Income available to
common stockholders 3,158 2,117
Convertible Preferred Dividends 407 435
------ ----- ----- ------ ----- -----
Net Earnings $3,565 6,934 $0.51 $2,552 6,579 $0.39
</TABLE>
7
<PAGE> 8
(6) Acquisitions
On April 3, 1996, the Company acquired Mobile Consultants, Inc. ("MCi")
of Alliance, Ohio, an originator and servicer of manufactured housing finance
contracts for other financial institutions. MCi originates primarily
non-mortgage, consumer loan contracts through dealers of manufactured homes
located in 27 eastern and midwest states. MCi also services the collection and
recovery of troubled loans for the financial institutions who 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 were comprised mainly of
accounts payable to dealers and lines of credit. The purchase price of $10.6
million was comprised of $1.0 million in cash, $4.0 million in notes due
quarterly during 1997, and the issuance of 307,386 shares of 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 $1.4 million to net earnings for the
quarter ended March 31, 1997. The earnings and expenses were consolidated into
the financials and will continue to be a significant part of future operations.
On December 30, 1996, the Corporation entered into a definitive
agreement for the acquisition of the stock of Summit Bancorp (Summit) by
FirstFederal. Under the terms of the agreement, FirstFederal will exchange 1.87
shares, subject to adjustment for the Corporation's 5-for-4 stock split
effective May 2, 1997, of its common stock for each of the 234,916 shares of
Summit stock. Based on the average of FirstFederal's closing bid and ask price
of $39.375 on December 31, 1996, the transaction would be valued at
approximately $17.3 million. The merger, which will be accounted for as a
pooling of interests, is expected to be consummated during the third quarter of
1997, pending Summit shareholder approval, regulatory approval and other
customary conditions of closing. The transaction is expected to be a tax-free
reorganization for federal income tax purposes. Summit Bancorp's subsidiary,
Summit Bank, has two commercial banking offices located in Summit County, Ohio.
At December 31, 1996, Summit had total assets of $81.3 million, deposits of
$67.8 million, and shareholders equity of $7.2 million. Summit reported net
income of $0.8 million for the year ended December 31, 1996.
On March 11, 1997, the Corporation announced a definitive agreement for
the acquisition of the stock of Alliance Corporate Resources, Inc. ("ACR"). ACR
originates lease financing of information technology equipment and provides
information technology management consulting services. ACR does business in 42
states, through office locations in Columbus, Ohio and Richmond, Virginia. Under
the terms of the agreement, the shareholders of ACR will receive 100% cash in
exchange for 100% of their shares. ACR shareholders will receive a payment of $2
million upon closing and participate in future ACR earnings for five years. The
acquisition will be accounted for under the purchase of stock method, and is
subject to regulatory approval. The transaction is expected to be completed in
the third quarter of 1997. ACR originated $21 million in lease transactions for
the year ended December 31, 1996.
8
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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
- ---------------------
The Company had net earnings of $3.6 million, or $0.68 per common
share, and $2.6 million, or $0.51 per common share, for the three month periods
ended March 31, 1997 and 1996, respectively. The increase of $1.0 million
(approximately 40%) is directly attributable to the Company's acquisition of
Mobile Consultants, Inc. (MCi) in April, 1996, as well as increased other
non-interest income, primarily retail banking fees and loan servicing income.
This increase was partially offset by higher non-interest expenses due to the
addition of MCi's operating expenses, which approximated $2.0 million for the
quarter ended March 31, 1997. Of the Company's net earnings of $3.6 million,
$1.4 million (approximately 40%) was due to MCi's earnings.
The annualized return on average assets ("ROA") for the three month
periods ended March 31, 1997 and 1996 was 1.32% and 1.07%, respectively. The
annualized return on shareholder's equity ("ROE") for the three month periods
ended March 31, 1997 and 1996 was 16.47% and 13.32%, respectively.
FirstFederal's net earnings are primarily dependent upon the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing liabilities. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rate
earned or paid, respectively. Net earnings are also affected by the Company's
non-interest income, which now includes manufactured housing brokerage fees from
MCi, and by its non-interest expenses.
When used in this Form 10-Q, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
9
<PAGE> 10
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 ,
-----------------------------------------------------
1997 1996
------------------------------------------------------
Average Average
Outstanding Yield/ Outstanding Yield/
Balance Rate(1) Balance Rate(1)
----------- ------ ----------- ------
(Dollars in Thousands)
<S> <C> <C>
Net interest income $ 6,394 $ 6,246
======== ========
Interest-earning assets:
Loans receivable $ 726,420 7.95% $601,678 8.04%
Mortgage-backed securities 171,078 6.32 260,065 6.40
Investments 89,222 6.50 58,468 6.96
--------- ---- -------- ----
Total average interest-earning assets 986,721 7.53 920,211 7.51
--------- ---- -------- ----
Interest-bearing liabilities:
Deposits 663,649 4.62 581,090 4.69
Borrowings 305,625 6.08 289,507 5.81
--------- ---- -------- ----
Total average interest-bearing liabilities 969,274 5.13 870,597 5.09
--------- ---- -------- ----
Average interest-free funds $ 17,447 $ 49,614
======== ========
Interest rate spread 2.40 2.42
Impact of interest-free funds .15 .30
----- -----
Interest rate margin(2) 2.55% 2.72%
==== ====
<FN>
- ------------------
(1) Annualized
(2) Net interest income divided by average interest-earning assets.
</TABLE>
Net interest income increased by $148,000 from $6.2 million in the first
quarter of 1996 to $6.4 million in the first quarter of 1997. This increase was
primarily the result of growth in average interest-earning assets, particularly
consumer and mortgage loans, which were funded by increases in deposits and
other borrowings. The interest rate margin decreased 17 basis points from 2.72%
to 2.55% for the three months ended March 31, 1996 and 1997 respectively. The
decline in the margin is attributed to a combination of the higher level of
average interest-bearing liabilities as well as increased rates paid on those
liabilities. In addition, growth in non-interest earning assets hampered the
interest rate margin. The ratio of interest-earning assets to total assets
declined from 92.6% on March 31, 1996 to 90.6% on March 31, 1997.
Total interest and dividend income was $18.7 million for the three months
ended March 31, 1997, an increase of $1.4 million, or 8.1%, from $17.3 million
for the same period in 1996. This increase resulted primarily from an increase
of $66.5 million in the average balance of interest-earning assets, particularly
loans receivable. Although yields on average interest-earning assets were lower
in the first quarter of 1997 than those in the first quarter of 1996, the shift
in assets toward loans resulted in a 4 basis point rise in the yield on total
average interest-earnings assets.
Interest expense was $12.3 million for the three months ended March 31,
1997, an increase of $1.3 million, or 11.8%, from the $11.0 million for the
three months ended March 31, 1996. This increase was due to growth in average
interest-bearing liabilities of $98.7 million for the period, as well as an
increase in the average cost of funds of 4 basis points from 5.09% at March 31,
1996 to 5.13% at March 31, 1997. This increase in cost of funds was primarily
due to increased rates paid on borrowings.
A provision of $107,000 was recorded for losses on loans for the first
quarter of 1997 as compared with a provision of $90,000 for the same period in
1996. The increased provision was due primarily to a continuing increase in
commercial and consumer loan originations which inherently have a higher risk
level than traditional
10
<PAGE> 11
1-4 family mortgage loans. Originations of commercial and consumer loans were
$15.7 million and $53.6 million for the first quarter of 1997, respectively, as
compared to $1.4 and $19.1 million, respectively, for the first quarter of 1996.
The primary component of the significant increase in consumer loan originations
is manufactured home loans, most of which are sold by the Company through
asset-backed securitizations. The reserves for loan losses are analyzed on an
ongoing basis and the adequacy of the reserves are determined by a detailed
review of problem loans and real estate owned as well as the historical trends
in the losses on the various types of loans. See "Non-performing Assets and Loan
Loss Reserves" for further information on the provisions and analysis of loan
loss reserves.
Total non-interest income was $6.0 million for the three months ended
March 31, 1997, up 275.0% from the $1.6 million for the same period in 1996.
This increase was primarily a result of the Company's acquisition of MCi in
April of 1996, as well as increased retail banking and other loan servicing
fees. Non-interest income was positively impacted by the addition of MCi in
primarily two ways. First, by engaging in the previously mentioned
securitization of manufactured housing loans originated by MCi, the Company
recognized a $2.3 million gain on the sale of loans in the first quarter of
1997. This gain resulted in an increase of $2.2 million (527.25%) in net gain on
sales of loans in the first quarter 1997 versus the first quarter of 1996.
Secondly, MCi's fee income for the brokerage and servicing of manufactured
housing contracts to banks other than First Federal Savings and Loan Association
of Wooster (the "Association") added $639,000 and $1.3 million respectively to
non-interest income for the quarter ended March 31, 1997. These sources of
non-interest income were not available to the Company prior to the acquisition
of MCi.
Total operating expenses during the three months ended March 31, 1997
were $6.7 million as compared to $3.8 million for the same period in 1996, an
increase of $2.9 million, or 76.3%. The increase in total operating expense was
due in part 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 $2.0 million in the first quarter of 1997.
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 attributed to the Association's new lines of business.
While non-interest expense continues to be negatively impacted by the
Company's efforts to reposition its balance sheet to a more community bank-like
structure, noninterest income growth has been substantially greater than the
growth in noninterest expense. One measure of effectiveness in this area is the
overhead ratio, which is the ratio of operating expenses (not including goodwill
amortization) less total non-interest income to net interest income. This ratio
improved from 46.29% in the first quarter of 1996 to 4.47% in the first quarter
of 1997, and is indicative of the effectiveness of management's effort to
diversify the Company's earnings stream while controlling costs.
Income tax expense increased by $747,000, or 55.8%, for the three months
ended March 31, 1997 in comparison to the same period in 1996. The increase was
a result of the 45.2% increase in pre-tax earnings. The increase in the
effective income tax rate from approximately 34% in 1996 to approximately 37%
for 1997 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 negative 1.6% at March 31, 1997 as compared to a positive 1.6% at
December 31, 1996.
In managing its interest-rate sensitivity gap position, FirstFederal
emphasizes the origination and retention of adjustable-rate mortgage loans and
mortgage-backed securities, consumer loans and home equity loans and 10 and 15
year fixed-rate mortgage loans. FirstFederal also attempts to maintain a large
base of core deposits,
11
<PAGE> 12
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 $7.7 million, or .72%,from
December 31, 1996 to March 31, 1997. On March 19, 1997, the Company issued $40.5
million in 9.125% subordinated debt which was used to pay down FHLB borrowings,
provide funds for loan originations and as a source of additional capital to
support future growth activities. Interest on the subordinated debt is payable
semiannually beginning in September of 1997, and the debt is redeemable at the
option of the Company at any time after March 31, 2002 until its maturity date
of March 31, 2004. In an effort to leverage the subordinated debt funds, the
Company engaged in a wholesale strategy whereby short duration mortgage-backed
securities are purchased using short duration borrowings at a positive spread.
This strategy will be unwound as retail assets and deposits are increased. As
previously discussed, the Company completed its second asset-backed
securitization of manufactured housing finance contracts in the first quarter of
1997. This securitization resulted in a $7.0 million increase in retained
interest from December 31, 1996. Future securitizations will result in
additional growth in retained interest.
First mortgage loans and loans held for sale decreased $3.5 million, or
.47% to $753.2 million at March 31, 1997 from $756.8 million at December 31,
1995. The decrease in the loan portfolio was due to a $29.1 million decrease in
loans held for sale, caused primarily by the securitized sale of $50 million in
manufactured housing loans sold and sales of mortgage loans. The sales were
partially offset by originations of $38.0 million in mortgage loans, $53.6
million in consumer loans (including $35.9 million in manufactured housing
originations) and $15.7 in commercial loans for the three months ended March 31,
1997. During the same period in 1996, originations of mortgage, consumer and
commercial loans totaled $86.1 million, $19.1 million and $1.4 million
respectively.
Mortgage-backed securities available for sale increased by $8.7 million,
or 9.2%, and investment securities available for sale declined by $12.7 million,
or 26.6%, from December 31, 1996 to March 31, 1997. The net decrease of $4.0
million provided funds which were primarily used for loan originations.
Total deposits decreased by $9.2 million, or 1.4%, to $662.7 million at
March 31, 1997 from $671.9 million at December 31, 1996. The decrease is due to
seasonal withdrawals by customers for the payment of income taxes and other net
outflows.
Total advances from the Federal Home Loan Bank (the "FHLB") and other
borrowings increased by $10.2 million or 3.3% during the three months ended
March 31, 1997. The increase is the result of the subordinated debt issue
discussed earlier, partially offset by repayment of FHLB advances.
Shareholders' equity increased by $2.6 million, or 3.1%, from $85.3
million at December 31, 1996 to $87.9 million, or 8.1% of total assets, at March
31, 1997. The increase in shareholders' equity was attributable to net earnings
for the three months ended March 31, 1997, partially offset by the payment of
dividends on both the common and preferred stocks of the Company. Also
offsetting equity growth was an additional unrealized loss on securities
available for sale at March 31, 1997.
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 $45,000 to $4.13 million at
March 31, 1997 from $4.17 million at December 31, 1996. The ratio of
non-performing and restructured assets to total assets was .38% at March 31,
1997 as compared to .37% at December 31, 1996. On March 31, 1997 $3.5 million or
85.4% of total non-performing and restructured assets are residential mortgage
loans, which traditionally have low loss ratios.
12
<PAGE> 13
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.
<TABLE>
<CAPTION>
03/31/97 12/31/96 09/30/96 06/30/96 03/31/96
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total non-accruing loans $ 3,741 $ 3,590 $ 1,253 $ 642 $1,107
Assets acquired in settlement of loans 260 241 233 231 90
Restructured loans 125 340 340 340 341
------ ------ ------ ------ -----
Total non-performing and
restructured assets $ 4,126 $ 4,171 $ 1,826 $1,213 $1,538
======= ======= ===== ===== =====
Total non-performing and restructured
assets as a percentage of total assets .38% .37% .16% .12% .15%
==== ==== ==== ==== ====
</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,
1997 in reserves to cover potential losses, representing 73% 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.
13
<PAGE> 14
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, 1997 was 7.7%, which was in excess of the
regulatory requirement, compared to 9.5% at December 31, 1996. 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.
At March 31, 1997, the Association exceeded all fully phased-in minimum
capital requirements established by the OTS. The management of the Association
is not aware of any proposed regulation or recommendation by the OTS, which, if
implemented, would have a material effect upon the Association. The
Association's capital ratios at March 31, 1997 are set forth below.
<TABLE>
<CAPTION>
OTS Requirement Association Ratio
--------------- -----------------
<S> <C> <C>
Tangible Capital 1.5% 9.2%
Leverage (Core) Capital 3.0% 9.2%
Risk-based Capital 8.0% 15.9%
</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, 1997
were 9.2%, 15.5% and 15.9%, 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, 1997, as well as the Association's level of risk-based
capital, management believes that this regulation will not affect the
Association's compliance with its risk-based capital requirements.
14
<PAGE> 15
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 5. Other Information
-----------------
Dividend
--------
On April 16, 1997, the Board of Directors declared a five-for-four
stock split, effected as a 25% stock dividend, granted to
shareholders of record on May 2, 1997. In addition to the stock
dividend, the Company announced a quarterly cash dividend of $.11
per common share. The dividend will be payable on May 22, 1997 to
shareholders of record as of May 2, 1997 on post-split shares. The
Board also declared dividends of $.4375 per share on the
Cumulative Convertible, Series A, Preferred stock and $.40625 per
share on the Cumulative Convertible, Series B, Preferred stock.
These dividends will be paid on June 2, 1997 to shareholders of
record as of May 10, 1997.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule
(b) One report on 8-K was filed during the quarterly period
covered by this report. On March 25, 1997, the Registrant
filed a Current Report on Form 8-K reporting the issuance of
$40.5 million in subordinated notes and the Registrant's
filing of an application to convert to a bank holding
company, with its primary subsidiary, First Federal Savings
and Loan Association of Wooster converting to a federal bank
charter.
All other items have been omitted as not required and not applicable under the
instructions.
15
<PAGE> 16
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 13, 1997 /s/ Gary G. Clark
--------------------------------- -------------------------------
Gary G. Clark
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date May 13, 1997 /s/ James J. Little
--------------------------------- --------------------------------
James J. Little
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED CONDENSED BALANCE SHEET AND STATEMENT OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 27,892
<INT-BEARING-DEPOSITS> 8,952
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 137,490
<INVESTMENTS-MARKET> 79,753
<LOANS> 753,249
<ALLOWANCE> 3,007
<TOTAL-ASSETS> 1,088,132
<DEPOSITS> 662,680
<SHORT-TERM> 0
<LIABILITIES-OTHER> 14,942
<LONG-TERM> 322,604
<COMMON> 4,053
22,079
0
<OTHER-SE> 61,774
<TOTAL-LIABILITIES-AND-EQUITY> 1,088,132
<INTEREST-LOAN> 14,544
<INTEREST-INVEST> 4,154
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 18,698
<INTEREST-DEPOSIT> 7,662
<INTEREST-EXPENSE> 12,304
<INTEREST-INCOME-NET> 6,394
<LOAN-LOSSES> 107
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,668
<INCOME-PRETAX> 5,650
<INCOME-PRE-EXTRAORDINARY> 3,565
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,565
<EPS-PRIMARY> .68
<EPS-DILUTED> .51
<YIELD-ACTUAL> 2.56
<LOANS-NON> 3,741
<LOANS-PAST> 0
<LOANS-TROUBLED> 125
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,916
<CHARGE-OFFS> 28
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 3,007
<ALLOWANCE-DOMESTIC> 3,007
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
