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 December 31, 1999
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 0-21638
FFY Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 34-1735753
(State of Incorporation) (IRS Employer Identification No.)
724 Boardman-Poland Road, Youngstown, Ohio
(Address of principal executive office)
44512
(Zip Code)
(330) 726-3396
(Registrant's telephone number, including area code)
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.
CLASS SHARES OUTSTANDING AT JANUARY 31, 2000
----- --------------------------------------
common stock, $.01 par value 6,873,536
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
December 31, June 30,
1999 1999
------------ --------
Assets
Cash $ 6,852,878 $ 5,362,745
Interest-bearing deposits 4,389,592 5,245,061
Short-term investments 325,000 865,000
-----------------------------
TOTAL CASH AND CASH EQUIVALENTS 11,567,470 11,472,806
Securities available for sale 163,057,101 190,325,599
Loans receivable 471,047,463 453,839,111
Loans available for sale 56,500 441,500
Interest and dividends receivable on securities 1,761,480 1,953,940
Interest receivable on loans 2,744,164 2,707,846
Federal Home Loan Bank stock, at cost 5,015,600 4,841,200
Office properties and equipment, net 7,384,065 7,218,640
Other assets 2,992,881 2,890,372
-----------------------------
TOTAL ASSETS $665,626,724 $675,691,014
=============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $442,996,900 $457,342,802
Securities sold under agreements to repurchase:
Short-term 6,614,523 6,617,747
Long-term 51,300,000 51,300,000
Borrowed funds:
Short-term 43,540,000 22,800,000
Long-term 50,000,000 60,000,000
Advance payments by borrowers for taxes and insurance 2,376,674 2,221,976
Other payables and accrued expenses 3,970,671 5,291,964
-----------------------------
TOTAL LIABILITIES 600,798,768 605,574,489
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized 5,000,000 shares; none outstanding - -
Common stock, $.01 par value:
Authorized 15,000,000 shares; issued 7,589,366 shares,
outstanding 6,865,536 shares at December 31, 1999
and 7,121,379 shares at June 30, 1999 75,894 75,894
Additional paid-in capital 38,285,590 38,092,628
Retained earnings, substantially restricted 48,513,494 46,243,673
Treasury stock, at cost, 723,830 shares at
December 31, 1999 and 467,987 shares at June 30, 1999 (13,342,072) (8,551,484)
Accumulated other comprehensive loss (5,963,358) (2,816,864)
Common stock purchased by:
Employee Stock Ownership and 401(k) Plan (2,459,802) (2,645,532)
Recognition and Retention Plans (281,790) (281,790)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 64,827,956 70,116,525
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $665,626,724 $675,691,014
=============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended Six months ended
December 31, December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest Income
Loans $ 9,639,374 $ 9,886,874 $19,165,422 $19,856,770
Securities available for sale 2,549,316 2,370,696 5,319,271 4,439,992
Federal Home Loan Bank stock 88,495 82,513 178,505 166,440
Other interest-earning assets 1,604 44,151 21,118 82,298
-----------------------------------------------------------------------
TOTAL INTEREST INCOME 12,278,789 12,384,234 24,684,316 24,545,500
-----------------------------------------------------------------------
Interest Expense
Deposits 4,758,636 5,097,583 9,620,348 10,311,174
Securities sold under agreements to repurchase:
Short-term 90,671 115,921 178,716 263,476
Long-term 755,650 749,623 1,502,842 1,499,247
Borrowed funds:
Short-term 437,436 427,919 765,723 874,870
Long-term 792,616 350,741 1,580,423 504,283
-----------------------------------------------------------------------
TOTAL INTEREST EXPENSE 6,835,009 6,741,787 13,648,052 13,453,050
NET INTEREST INCOME 5,443,780 5,642,447 11,036,264 11,092,450
Provision for loan losses 104,851 124,546 205,913 249,963
-----------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,338,929 5,517,901 10,830,351 10,842,487
-----------------------------------------------------------------------
Non-Interest Income
Service charges 288,414 218,300 543,575 416,502
Gain (loss) on sale of securities available for sale 27,595 (6,542) 28,904 57,713
Gain on sale of loans 58,677 277,379 118,468 388,832
Other 173,236 193,409 323,587 437,183
-----------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 547,922 682,546 1,014,534 1,300,230
-----------------------------------------------------------------------
Non-Interest Expense
Salaries and employee benefits 1,648,580 1,603,698 3,305,037 3,184,256
Net occupancy and equipment 492,928 498,293 1,008,478 998,734
Insurance and bonding 117,784 119,655 233,675 244,074
State and local taxes 251,154 260,374 501,362 508,998
Other 588,451 655,748 1,385,818 1,328,644
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TOTAL NON-INTEREST EXPENSE 3,098,897 3,137,768 6,434,370 6,264,706
-----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 2,787,954 3,062,679 5,410,515 5,878,011
Income taxes 836,000 1,029,440 1,617,000 1,960,232
Minority interest in loss of consolidated subsidiaries (1,735) - (3,592) -
-----------------------------------------------------------------------
NET INCOME $ 1,953,689 $ 2,033,239 $ 3,797,107 $ 3,917,779
=======================================================================
BASIC EARNINGS PER SHARE $ 0.31 $ 0.28 $ 0.59 $ 0.54
=======================================================================
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.27 $ 0.57 $ 0.52
=======================================================================
CASH DIVIDENDS DECLARED PER SHARE $ 0.125 $ 0.1125 $ 0.25 $ 0.225
=======================================================================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Six months ended
December 31,
---------------------------
1999 1998
---- ----
Balance at July 1 $70,116,525 $84,215,701
Comprehensive income:
Net income 3,797,107 3,917,779
Change in unrealized holding gain (loss) on securities available
for sale, net of reclassification adjustment and tax effect (3,146,494) 337,260
---------------------------
Comprehensive income 650,613 4,255,039
Dividends paid, $.2375 and $.2125 per share, respectively (1,527,286) (1,555,303)
Treasury stock purchased (5,278,149) (5,565,120)
Stock options exercised 132,430 313,710
Amortization of KSOP expense 185,730 194,520
Tax benefit related to exercise of stock options 91,905 124,027
Difference between average fair value per share and cost
per share on KSOP shares committed to be released 456,188 416,544
---------------------------
Balance at December 31 $64,827,956 $82,399,118
===========================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
December 31,
-----------------------------
1999 1998
---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,933,137 $ 4,015,137
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available for sale 3,005,000 7,697,077
Proceeds from sales of securities available for sale 14,854,760 17,149,709
Purchase of securities available for sale (742,661) (88,372,119)
Principal receipts on securities available for sale 5,267,176 17,484,726
Net (increase) decrease in loans (17,052,384) 13,547,512
Purchase of office properties and equipment (690,033) (214,144)
Other, net 99,253 (72,748)
-----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,741,111 (32,779,987)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (14,403,173) 12,725,184
Net decrease in short-term securities sold under
agreements to repurchase (3,224) (3,610,816)
Net increase (decrease) in short-term borrowed funds 20,740,000 (4,485,000)
Proceeds from long-term borrowed funds - 35,000,000
Principal repayments on long-term borrowed funds (10,000,000) -
Decrease in amounts due to bank (981,571) (616,012)
Treasury stock purchases (5,278,149) (5,565,120)
Dividends paid (1,527,286) (1,555,303)
Proceeds from stock options exercised 132,430 313,710
Other, net (258,611) (226,788)
-----------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (11,579,584) 31,979,855
-----------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 94,664 3,215,005
CASH AND CASH EQUIVALENTS
Beginning of period 11,472,806 10,075,182
-----------------------------
End of period $ 11,567,470 $ 13,290,187
=============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments of interest expense $ 13,839,432 $ 13,292,603
Cash payments of income taxes - 1,935,000
Loans originated for sale 7,690,965 16,087,760
Proceeds from sales of loans originated for sale 8,194,434 15,348,810
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation:
The interim consolidated financial statements of the Company
include the accounts of FFY Financial Corp. and its wholly-owned
subsidiaries FFY Bank (formerly known as First Federal Savings
Bank of Youngstown) and FFY Holdings, Inc. The consolidated
financial statements also include the accounts of FFY Insurance
(formerly known as Daniel W. Landers Insurance, Ltd.), an
affiliate of FFY Holdings, Inc., through its two-thirds
controlling interest in FFY Insurance. FFY Holdings, Inc.'s
other affiliate, Coldwell Banker FFY Real Estate, is accounted
for using the equity method of accounting and is therefore not
consolidated since FFY Holdings, Inc. has a non-controlling one-
third interest in the real estate company. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Basis of Presentation:
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. The financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto included in FFY Financial Corp.'s
1999 Annual Report to Shareholders incorporated by reference
into FFY Financial Corp.'s 1999 Annual Report on Form 10-K. The
interim consolidated financial statements include all
adjustments (consisting of only normal recurring items) which,
in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations
for the periods presented. The results of operations for the
interim periods disclosed herein are not necessarily indicative
of the results that may be expected for a full year.
(c) Earnings Per Share:
The computation of basic and diluted earnings per share is shown
in the following table.
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Basic earnings per share computation:
Numerator - Net income $1,953,689 $2,033,239 $3,797,107 $3,917,779
Denominator - Weighted average common
shares outstanding 6,374,702 7,258,664 6,446,262 7,307,074
Basic earnings per share $ 0.31 $ 0.28 $ 0.59 $ 0.54
=======================================================
Diluted earnings per share computation:
Numerator - Net income $1,953,689 $2,033,239 $3,797,107 $3,917,779
Denominator - Weighted average common
shares outstanding 6,374,702 7,258,664 6,446,262 7,307,074
Dilutive effect of stock options 194,107 234,192 209,599 241,334
-------------------------------------------------------
Weighted average common shares
and common stock equivalents 6,568,809 7,492,856 6,655,861 7,548,408
Diluted earnings per share $ 0.30 $ 0.27 $ 0.57 $ 0.52
=======================================================
(d) Reclassifications:
Certain amounts in the prior period consolidated financial
statements have been reclassified to conform with the current
period's presentation.
(2) EFFECT OF RECENT FINANCIAL ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an Amendment of FASB
Statement 133. This statement standardizes the accounting for
derivative contracts, by requiring that an entity recognize those
items as assets or liabilities in the statement of financial condition
and measure them at fair value. SFAS No. 137 is effective for fiscal
years beginning after June 15, 2000. Management is currently
evaluating the effects SFAS No. 137 will have on the Company's
financial condition and results of operations.
PART I: FINANCIAL INFORMATION
FFY FINANCIAL CORP.
DECEMBER 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following analysis discusses changes in the Company's financial
condition and results of operations at and for the three and six months
ended December 31, 1999.
Forward-Looking Statements
When used in this Form 10-Q, or, in future filings by FFY Financial Corp.
with the Securities and Exchange Commission, in FFY Financial Corp.'s press
releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the
words or phrases "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, but not limited to, changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, 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 and other factors 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 result 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.
Year 2000
On January 1, 2000, FFY Financial Corp. reported that its wholly owned
subsidiary, FFY Bank, had successfully completed its processing for 1999 and
had tested all mission critical systems for proper operation due to the
change to the Year 2000. Various audit teams from FFY Bank confirmed that
environmental services, such as utilities and telecommunications, were
operating properly. Other technical staff processed a comprehensive list of
customer transactions, thereby confirming that all accounting systems were
operating correctly. Based on operations since January 1, 2000, the Company
does not expect any significant impact to its ongoing business as a result
of the Year 2000. However, it is possible that the full impact of the date
change, which was of concern due to computer programs that use two digits
instead of four digits to define years, has not been fully recognized. For
example, it is possible that Year 2000 or similar issues such as leap year
related problems may occur with customer accounting systems. The Company
believes that any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively affected if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The
Company currently is not aware of any significant Year 2000 or similar
problems that have arisen for its customers and suppliers.
The Company spent nearly $1 million in its Year 2000 readiness efforts,
including $429,000 for a new comprehensive software system in 1998. In
addition to the new software system, monies were spent to replace outdated,
noncompliant hardware and software as well as identifying and remediating
Year 2000 problems.
Financial Condition
General. Total assets at December 31, 1999 were $665.6 million, a decrease
of $10.1 million, or 1.5% compared to $675.7 million at June 30, 1999. The
decrease in assets was primarily attributable sales of securities available
for sale in order to meet the liquidity needs as a result of a decline in
deposits. Total liabilities at December 31, 1999 were $600.8 million, a
decrease of $4.8 million, or 0.8% compared to $605.6 million at June 30,
1999.
Securities. The Company's securities portfolio decreased $27.2 million, or
14.3% during the six months ended December 31, 1999, and totaled $163.1
million at December 31, 1999 compared to $190.3 million at June 30, 1999.
The decrease over the six month period consisted of $14.8 million, $3.0
million and $5.3 million in security sales, maturities and principal
receipts on mortgage-backed securities, respectively. Additionally, there
was an increase in the gross unrealized loss on securities available for
sale totaling $4.8 million, reflecting an increase in interest rates.
Security purchases totaling $743,000 for the six months ended December 31,
1999 partially offset the aforementioned decreases.
Loans. Net loans receivable, including loans available for sale, increased
$16.8 million, or 3.7% during the six months ended December 31, 1999, and
totaled $471.1 million at December 31, 1999 compared to $454.3 million at
June 30, 1999. The increase in loans receivable during the six month period
was largely the result of retaining loans in FFY Bank's portfolio as opposed
to selling them in the secondary market (see next paragraph) during the
increasing interest rate environment that existed during the current fiscal
year. First mortgage loans secured by one- to four -family residences
represented the largest area of dollar volume growth in FFY Bank's loan
portfolio during the six months ended December 31, 1999. Growth in FFY
Bank's home equity loans also contributed to the increase in loans
receivable during the six months ended December 31, 1999.
FFY Bank's secondary market mortgage lending operation is designed to
originate and sell qualifying loans to the Fannie Mae. FFY Bank sold 96
loans during the six months ended December 31, 1999, resulting in a pre-tax
gain of $118,000, compared to sales of 195 loans for a pre-tax gain of
$389,000 for the six months ended December 31, 1998. FFY Bank's secondary
market mortgage lending slowed during fiscal year 2000 due to an increase in
market interest rates, which is evident by the reduced number of loans sold.
However, management expects that the secondary market mortgage lending
program will continue as long as market conditions allow it to be
profitable.
Deposits. Deposits decreased $14.3 million, or 3.1% during the six months
ended December 31, 1999, and totaled $443.0 million at December 31, 1999
compared to $457.3 million at June 30, 1999. The decrease in deposits was
from declines in certificate and passbook accounts of $15.7 million and
$4.7 million, respectively, partially offset by increases in money market
and NOW accounts of $4.3 million and $1.8 million, respectively. The level
of deposit flows during any given period is heavily influenced by factors
such as the general level of interest rates as well as alternative yields
that investors may obtain on competing instruments, such as money market
mutual funds and other investments. Net deposit outflows during the six
months ended December 31, 1999 were funded by the decline in securities
available for sale.
Stockholders' Equity. Total stockholders' equity declined $5.3 million, or
7.5% during the six months ended December 31, 1999 and totaled $64.8 million
at December 31, 1999 compared to $70.1 million at June 30, 1999. This
decline resulted principally from treasury stock repurchases, an increase in
net unrealized holding losses on available-for-sale securities and dividends
paid to shareholders. These declines were partially offset by net income
for the six months ended December 31, 1999.
Results of Operations
Comparison of the Three and Six Months Ended December 31, 1999 and 1998
General. The Company recorded net income for the three and six months ended
December 31, 1999 of $2.0 million and $3.8 million, respectively, compared
to $2.0 million and $3.9 million, respectively, for the three and six months
ended December 31, 1998. Diluted earnings per share for the three and six
months ended December 31, 1999 were $0.30 and $0.57, respectively, compared
to diluted earnings per share of $0.27 and $0.52, respectively, for the
three and six months ended December 31, 1998.
Interest Income. Total interest income for the three months ended December
31, 1999 was $12.3 million, a decrease of $105,000, or 0.9% compared to
$12.4 million for the three months ended December 31, 1998. Interest income
from loans totaled $9.6 million for the three months ended December 31,
1999, a decrease of $248,000, or 2.5% compared to $9.9 million for the three
months ended December 31, 1998. The $248,000 decrease in interest from
loans was the result of a decline in the average yield earned on loans and,
to a lesser extent, a decline in the average balance of loans outstanding.
Interest income from securities totaled $2.5 million for the three months
ended December 31, 1999, an increase of $179,000, or 7.5% compared to $2.4
million for the three months ended December 31, 1998. The $179,000 increase
in interest from securities was mainly attributable to an increase in yield
earned on securities.
Total interest income for the six months ended December 31, 1999 was $24.7
million, an increase of $139,000, or 0.6% compared to $24.5 million for the
six months ended December 31, 1998. Interest income from securities totaled
$5.3 million for the six months ended December 31, 1999, an increase of
$879,000, or 19.8% compared to $4.4 million for the six months ended
December 31, 1998. The $879,000 increase in interest from securities was
attributable to an increase in the average balance of securities, and to a
lesser extent, an increase in yield earned on securities. Interest income
from loans totaled $19.2 million for the six months ended December 31, 1999,
a decrease of $691,000, or 3.5% compared to $19.9 million for the six months
ended December 31, 1998. The $691,000 decrease in interest from loans was
the result of a decline in the average balance of loans outstanding and, to
a lesser extent, a decline in the average yield earned on loans.
Although the average balance of loans declined comparing the three and six
months ended December 31, 1999 and 1998, the trend of a declining loan
portfolio reversed during the current fiscal year mainly due to retaining
loans in FFY Bank's loan portfolio as opposed to selling them in the
secondary market. In addition, the trend of a growing securities portfolio
reversed during the current fiscal year due to proceeds from securities
transactions being used to fund deposit outflows and loan growth.
Interest Expense. Total interest expense for the three months ended
December 31, 1999 was $6.8 million, an increase of $93,000, or 1.4% compared
to $6.7 million for the three months ended December 31, 1998. Interest
expense from long-term borrowed funds totaled $793,000 for the three months
ended December 31, 1999, an increase of $442,000 compared to $351,000 for
the three months ended December 31, 1998. The $442,000 increase in interest
expense from long-term borrowed funds is predominantly due to an increase in
the average balance of such borrowings. Interest expense on deposits
totaled $4.8 million for the three months ended December 31, 1999, a
decrease of $339,000, or 6.6% compared to $5.1 million for the three months
ended December 31, 1998. The $339,000 decrease in interest expense from
deposits is mainly due to a decline in rates paid on deposit accounts, and
to a lesser extent, a decline in the average balance of deposit balances.
Total interest expense for the six months ended December 31, 1999 was $13.6
million, an increase of $195,000, or 1.4% compared to $13.4 million for the
six months ended December 31, 1998. Interest expense from long-term
borrowed funds totaled $1.6 million for the six months ended December 31,
1999, an increase of $1.1 million compared to $504,000 for the six months
ended December 31, 1998. The $1.1 million increase in interest expense from
long-term borrowed funds is predominantly due to an increase in the average
balance of such borrowings. Interest expense on deposits totaled $9.6
million for the six months ended December 31, 1999, a decrease of $691,000,
or 6.7% compared to $10.3 million for the six months ended December 31,
1998. The $691,000 decrease in interest expense from deposits is mainly due
to a decline in rates paid on deposit accounts, and to a lesser extent, a
decline in the average balance of deposit balances. Declines in interest
expense from short-term repurchase agreements and borrowed funds also
contributed to the decrease in interest expense comparing the six-month
periods, both primarily due to a decline in average balance.
Provision for Loan Losses. The provision for loan losses totaled $105,000
and $206,000 for the three and six months ended December 31, 1999,
respectively, compared to $125,000 and $250,000 for same periods last year.
The provision for loan losses reflects management's evaluation of the
underlying credit risk of FFY Bank's loan portfolio to adequately provide
for probable loan losses inherent in the loan portfolio as of the balance
sheet date. The ratio of allowance for loan losses to non-performing assets
was 96.1% at December 31, 1999, down from 112.3% at June 30, 1999, primarily
due to an increase in non-performing assets, most particularly non-accrual
loans. Non-accrual loans increased $459,000 from $2.2 million at June 30,
1999 to $2.6 million at December 31, 1999, predominantly in FFY Bank's one-
to four -family portfolio. Future additions to the allowance for loan
losses will be dependent on a number of factors including the performance of
FFY Bank's loan portfolio, the economy, changes in interest rates and the
effect of such changes on real estate values and inflation. Management
believes that the allowance for loan losses was adequate at December 31,
1999.
Non-Interest Income. Non-interest income totaled $548,000 for the three
months ended December 31, 1999, a decrease of $135,000, or 19.7% compared to
$683,000 for the three months ended December 31, 1998. Non-interest income
totaled $1.0 million for the six months ended December 31, 1999, a decrease
of $286,000, or 22.0% compared to $1.3 million for the six months ended
December 31, 1998. The three- and six-month declines in non-interest income
primarily reflects FFY Bank's slowing secondary market sales of loans (see
Financial Condition - Loans on page 10 of this report). Gains from sales of
loans decreased $219,000 comparing the three month periods and $270,000
comparing the six month periods. An increase in service charges, mainly
from NOW accounts, commercial checking accounts and debit card income
partially offset the decline in gains from loans sold for both the three-
and six-month periods. The $114,000 decline in other non-interest income
comparing the six months ended December 31, 1999 and 1998 primarily reflects
the activities of FFY Financial Corp.'s former real estate affiliate, First
Real Estate, Ltd., being consolidated in the prior year period since FFY
Financial Corp.'s interest was a controlling two-thirds; whereas FFY
Financial Corp.'s current real estate affiliate, Coldwell Banker FFY Real
Estate, is accounted for using the equity method of accounting since FFY
Financial Corp.'s investment is a non-controlling one-third.
Non-Interest Expense. Non-interest expense totaled $3.1 million for both
the three months ended December 31, 1999 and 1998. For the six months ended
December 31, 1999, non-interest expense totaled $6.4 million, up $170,000,
or 2.7% from $6.3 for the six months ended December 31, 1998. Expenses
related to FFY Financial Corp.'s affiliates name change, which was announced
on July 12, 1999, contributed to the $170,000 increase comparing the six
month periods. FFY Financial Corp. completed the name change for its
affiliates to better reflect a single identity for the banking, insurance
and real estate lines of business it operates.
Income Taxes. Income taxes totaled $836,000 for the three months ended
December 31, 1999, a decrease of $193,000 compared to $1.0 million for the
three months ended December 31, 1998. For the six months ended December 31,
1999, income taxes totaled $1.6 million, a decrease of $343,000 compared to
$2.0 million for the six months ended December 31, 1998. The decline in
income taxes for the three and six month periods resulted from less income
before tax and a reduction in the Company's effective tax rate due to
increased income from tax-exempt securities.
Effect of New Accounting Standards
Refer to Note 2 of the Notes to Consolidated Financial Statements contained
in this report.
Liquidity and Cash Flows
In general terms, liquidity is a measurement of the Company's ability to
meet its cash needs. The Company's objective in liquidity management is to
maintain the ability to meet loan commitments, purchase securities or to
repay deposits and other liabilities in accordance with their terms without
an adverse impact on current or future earnings. The Company's principal
sources of funds are deposits, amortization and prepayments of loans,
maturities, sales and principal receipts of securities, borrowings,
repurchase agreements and operations.
Federal regulations require FFY Bank to maintain minimum levels of liquid
assets in each calendar quarter of not less than 4% of either (i) its
liquidity base at the end of the preceding quarter, or (ii) the average
daily balance of its liquidity base during the preceding quarter. FFY
Bank's liquidity exceeded the applicable liquidity requirement at December
31, 1999 and 1998. Simply meeting the liquidity requirement does not
automatically mean FFY Bank has sufficient liquidity for a safe and sound
operation. Regulations also include a separate requirement that each thrift
must maintain sufficient liquidity to ensure its safe and sound operation.
Thus, adequate liquidity may vary depending on FFY Bank's overall
asset/liability structure, market conditions, the activities of competitors,
and the requirements of its own deposit and loan customers. Management
believes FFY Bank's liquidity is sufficient.
Liquidity management is both a daily and long-term responsibility of
management. FFY Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and securities
and (iv) the objective of its asset/liability management program. Along
with its liquid assets, FFY Bank has additional sources of liquidity
available including, but not limited to, the ability to obtain deposits by
offering above-market interest rates and access to advances from the Federal
Home Loan Bank.
The primary investing activities of the Company are originating loans and
purchasing securities. For the six months ended December 31, 1999, an
increase in FFY Bank's loan portfolio used $17.1 million, whereas a decline
in the securities portfolio provided $22.4 million. For the six months
ended December 31, 1998, a decline in FFY Bank's loan portfolio provided
$13.5 million, whereas growth in the securities portfolio used $46.0
million. Generally, during periods of declining interest rates, FFY Bank
would be expected to experience increased loan prepayments, which would
likely be reinvested at lower interest rates. During periods of increasing
interest rates, loan prepayments would be expected to decline, reducing
funds available for investment at higher interest rates.
The primary financing activities of the Company are deposits, repurchase
agreements and borrowings. For the six months ended December 31, 1999, a
decline in deposit accounts used $14.4 million, whereas an increase in
borrowed funds provided $10.7 million. The effect of repurchase agreements
was immaterial for the six months ended December 31, 1999. For the six
months ended December 31, 1998, increases in deposits and borrowed funds
provided $12.7 million and $30.5 million, respectively, whereas a decline in
repurchase agreements used $3.6 million.
Capital Resources
Office of Thrift Supervision (OTS) regulations require savings institutions
to maintain certain minimum levels of regulatory capital. An institution
that fails to comply with its regulatory capital requirements must obtain
OTS approval of a capital plan and can be subject to a capital directive and
certain restrictions on its operations. At December 31, 1999, the minimum
capital regulations require institutions to have tangible capital to total
tangible assets of 1.5%; a minimum leverage ratio of core (Tier 1) capital
to total adjusted tangible assets of 3.0%; and a minimum ratio of total
capital (core capital and supplementary capital) to risk weighted assets of
8.0%, of which 4.0% must be core capital.
Under the prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on an institution's financial statements. The
regulations establish a framework for the classification of savings
institutions into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Generally, an institution is considered well capitalized
if it has a core (Tier 1) capital ratio of at least 5.0% (based on average
total assets); a core (Tier 1) risk-based capital ratio of at least 6.0%;
and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors.
At December 31, 1999, FFY Bank met all capital adequacy requirements to
which it was subject. Further, the most recent OTS notification categorized
FFY Bank as a well-capitalized institution under the prompt corrective
action regulations. There have been no conditions or events since that
notification that management believes have changed FFY Bank's capital
classification.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in information about market risk from that
provided in the 1999 Annual Report to Shareholders, which was incorporated
by reference into FFY Financial Corp.'s 1999 Annual Report on Form 10-K.
PART II: OTHER INFORMATION
FFY FINANCIAL CORP.
DECEMBER 31, 1999
Item 1. Legal Proceedings
FFY Financial Corp. or FFY Holdings, Inc. is not a party to any material
legal proceeding before any court or regulatory authority, administrative
agency or other tribunal. Further, FFY Financial Corp. or FFY Holdings,
Inc. is not aware of the threat of any such proceeding.
As part of its ordinary course of business, FFY Bank is a party to several
lawsuits involving a variety of claims, including the collection of
delinquent accounts. No litigation is pending or, to FFY Bank's knowledge,
threatened in which FFY Bank faces potential loss or exposure which would
have a material impact on its financial condition or results of operations.
FFY Bank is not involved in any administrative or judicial proceeding under
any Federal, State or Local provisions which have been enacted or adopted
relating to the protection of the environment.
Item 2. Changes in Securities
None to be reported.
Item 3. Defaults on Senior Securities
None to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
On October 20, 1999, FFY Financial Corp. held its annual meeting of
stockholders. The matters approved by stockholders at the annual meeting
and the number of votes cast for, against or withheld (as well as the number
of abstentions and broker non-votes) as to each matter are set forth below.
Election of Directors for a three-year term:
BROKER
NAME FOR WITHHELD NON-VOTES
---- --- -------- ---------
Jeffrey L. Francis 5,905,971 55,602 -0-
Samuel A. Roth 5,916,032 45,541 -0-
Ronald P. Volpe, Ph.D. 5,931,376 30,197 -0-
Ratification of the Appointment of Auditors for a one-year term:
BROKER
NAME FOR AGAINST ABSTAIN NON-VOTES
---- --- ------- ------- ---------
KPMG LLP 5,939,275 9,662 12,635 -0-
Item 5. Other Information
None to be reported.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits: Exhibit 27 - Financial Data Schedule.
B. Reports on Form 8-K: On October 19, 1999, the Registrant announced
earnings of $1.8 million, or $0.27 per diluted share for the quarter
ended September 30, 1999 and an increase in the regular quarterly
dividend from 11.25 cents per share to 12.5 cents per share.
Pursuant 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.
FFY Financial Corp.
Date: February 11, 2000 By: /s/ Jeffrey L. Francis
-------------------------------
Jeffrey L. Francis
President and Chief Executive
Officer
(Principal Executive Officer)
Date: February 11, 2000 By: /s/ Therese Ann Liutkus
-------------------------------
Therese Ann Liutkus
Treasurer and Chief Financial
Officer
(Principal Financial and
Accounting Officer)