UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1996
[ ] 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, 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, 1997
----- --------------------------------------
common stock, $.01 par value 4,322,304
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 8
Part II. Other Information:
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults on Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1996 June 30,
(Unaudited) 1996
------------ ------------
ASSETS
- ------
Cash $ 3,172,862 $ 3,374,031
Interest-bearing deposits 7,980,618 4,888,366
Short-term investments 17,170,000 0
----------------------------
TOTAL CASH AND CASH EQUIVALENTS 28,323,480 8,262,397
Securities available for sale 83,484,010 109,835,614
Loans receivable 453,270,165 438,789,657
Interest and dividends receivable on securities 1,103,229 1,845,835
Interest receivable on loans 2,437,945 2,312,575
Federal Home Loan Bank stock, at cost 3,906,900 3,773,800
Office properties and equipment 7,927,253 7,973,576
Real estate owned 118,000 0
Other assets 1,760,397 2,808,873
----------------------------
TOTAL ASSETS $582,331,379 $575,602,327
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposit accounts $460,707,880 $456,540,807
Securities sold under agreements to repurchase 6,888,166 6,639,553
Borrowed funds 25,000,000 1,200,000
Advance payments by borrowers for taxes and insurance 2,481,512 2,279,624
Other payables and accrued expenses 3,911,745 7,021,490
----------------------------
TOTAL LIABILITIES 498,989,303 473,681,474
Commitments 0 0
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized 5,000,000 shares; none outstanding 0 0
Common stock, $.01 par value:
Authorized 15,000,000 shares; issued 6,630,000 shares,
outstanding 4,318,859 shares at December 31, 1996
and 5,081,198 shares at June 30, 1996 66,300 66,300
Additional paid-in capital 63,853,608 63,529,201
Retained earnings, substantially restricted 72,035,052 72,165,978
Treasury stock, at cost, 2,311,141 shares at
December 31, 1996 and 1,548,802 shares at June 30, 1996 (48,840,004) (28,492,183)
Unrealized gain (loss) on securities available for sale, net 162,442 (869,461)
Common stock purchased by:
Employee stock ownership plan (3,653,532) (3,865,692)
Recognition and retention plans (281,790) (613,290)
----------------------------
TOTAL STOCKHOLDERS' EQUITY 83,342,076 101,920,853
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $582,331,379 $575,602,327
============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
INTEREST INCOME
Mortgage loans $ 8,359,981 $ 7,911,450 $16,560,483 $15,617,496
Consumer and other loans 1,297,540 930,980 2,583,591 1,836,406
Securities available for sale 1,469,972 1,732,255 3,082,739 3,560,481
Securities held to maturity 0 204,522 0 374,084
Federal Home Loan Bank stock 68,744 64,312 136,301 127,510
Other interest-earning assets 392,148 39,671 434,460 214,881
------------------------------------------------------
TOTAL INTEREST INCOME 11,588,385 10,883,190 22,797,574 21,730,858
------------------------------------------------------
INTEREST EXPENSE
Deposit accounts 5,511,464 5,540,797 10,934,108 11,143,284
Securities sold under agreements to repurchase 71,232 0 156,631 0
Borrowed funds 344,211 12,994 402,524 12,994
------------------------------------------------------
TOTAL INTEREST EXPENSE 5,926,907 5,553,791 11,493,263 11,156,278
------------------------------------------------------
NET INTEREST INCOME 5,661,478 5,329,399 11,304,311 10,574,580
Provision for loan losses 198,614 72,930 353,030 149,096
------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,462,864 5,256,469 10,951,281 10,425,484
------------------------------------------------------
NON-INTEREST INCOME
Service charges 133,745 131,451 262,917 270,039
Gain (loss) on sale of securities 173,454 16,777 (369,676) 16,777
Other 85,840 146,579 175,672 263,329
------------------------------------------------------
TOTAL NON-INTEREST INCOME 393,039 294,807 68,913 550,145
------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,578,514 1,467,841 3,015,726 2,917,845
Net occupancy 188,577 171,427 372,694 342,251
Insurance and bonding 257,090 323,035 3,587,353 644,599
State and local taxes 269,527 262,385 539,051 524,762
Depreciation 231,517 241,175 466,050 473,097
Other 489,199 391,405 986,466 897,412
------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 3,014,424 2,857,268 8,967,340 5,799,966
------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 2,841,479 2,694,008 2,052,854 5,175,663
FEDERAL INCOME TAX EXPENSE 940,000 918,000 647,000 1,748,000
------------------------------------------------------
NET INCOME $ 1,901,479 $ 1,776,008 $ 1,405,854 $ 3,427,663
======================================================
EARNINGS PER SHARE $ 0.39 $ 0.35 $ 0.29 $ 0.67
======================================================
CASH DIVIDENDS DECLARED PER SHARE $ 0.175 $ 0.15 $ 0.35 $ 0.30
======================================================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Six months ended
December 31,
----------------------------
1996 1995
---- ----
Balance at July 1, $101,920,853 $106,400,098
Net income 1,405,854 3,427,663
Dividends paid, $.325 and $.275 per share, respectively (1,536,780) (1,375,963)
Treasury stock purchased (21,175,509) (5,902,645)
Stock options exercised 432,460 200,590
Amortization of ESOP expense 212,160 221,340
Amortization of RRP stock awards 331,500 340,974
Tax benefit related to RRP stock awards 148,298 110,694
Tax benefit related to exercise of stock options 264,453 18,118
Difference between average fair value per share and
cost per share on ESOP shares committed to be released 306,884 248,141
Change in unrealized loss on securities
available for sale, net 1,031,903 684,474
----------------------------
$ 83,342,076 $104,373,484
============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
December 31,
----------------------------
1996 1995
---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,519,714 $ 5,402,139
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available for sale 22,000,000 29,000,000
Proceeds from sales of securities available for sale 38,291,582 5,042,652
Purchase of securities available for sale (35,527,032) (15,327,992)
Purchase of securities held to maturity 0 (4,099,233)
Principal receipts on securities available for sale 2,652,182 0
Principal receipts on securities held to maturity 0 1,227,662
Net increase in loans (14,663,299) (17,864,788)
Purchase of office properties and equipment (429,439) (537,474)
Other, net 10,000 25,122
----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,333,994 (2,534,051)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 4,337,236 (5,096,896)
Net increase in securities sold under agreements to repurchase 248,613 0
Net increase in short-term borrowings 23,800,000 5,320,000
Net decrease in amounts due to bank (1,952,805) (314,177)
Treasury stock purchases (21,175,509) (5,902,645)
Dividends paid (1,536,780) (1,375,963)
Other, net (513,380) 753,727
----------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,207,375 (6,615,954)
----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,061,083 (3,747,866)
CASH AND CASH EQUIVALENTS
Beginning of period 8,262,397 11,734,251
----------------------------
End of period $ 28,323,480 $ 7,986,385
============================
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)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
These interim consolidated financial statements of the Company include the
accounts of FFY Financial Corp. (Holding Company) and its wholly-owned
subsidiary First Federal Savings Bank of Youngstown (Bank). These financial
statements are prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1996 Annual Report to Shareholders.
These 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.
Earnings Per Share:
The computation of primary and fully diluted earnings per share is based on
the weighted average number of common stock and common stock equivalent
shares outstanding during the three and six months ended December 31, 1996
and 1995. Stock options are regarded as common stock equivalents and are,
therefore, considered in both primary and fully diluted earnings per share
computations. Common stock equivalents are computed using the treasury
stock method and, therefore, fully diluted earnings per share reflect
additional dilution related to stock options due to the use of the market
price at the end of the period, when higher than the average price for the
period. ESOP shares that have not been committed to be released are not
considered outstanding for the computation of primary and fully diluted
earnings per share in accordance with Statement of Position 93-6, Employers'
Accounting for Employee Stock Ownership Plan. The weighted average number
of shares of common stock and common stock equivalents outstanding during
the three and six months ended December 31, 1996 were 4,881,814 and
4,876,613, respectively. The weighted average number of shares of common
stock and common stock equivalents outstanding during the three and six
months ended December 31, 1995 were 5,073,496 and 5,149,126, respectively.
Fully diluted earnings per share is not significantly different than primary
earnings per share.
Reclassifications:
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
NOTE B - SIGNIFICANT EVENTS
On November 20, 1996, the Holding Company commenced a Modified Dutch Auction
Tender Offer (Tender Offer) whereby FFY Financial Corp. offered to purchase
up to 1.5 million shares of its common stock within a price range of $24 to
$26 per share. As a result of the Tender Offer, which expired on December
20, 1996, the Holding Company purchased 808,000 shares, approximately 15.8%
of the shares outstanding, at $26 per share. The total cost of the Tender
Offer was $21.2 million which included $170,000 in expenses capitalized to
treasury stock. Final settlement of the transaction occurred on December
31, 1996.
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FFY FINANCIAL CORP.
DECEMBER 31, 1996
The following analysis discusses changes in the financial condition and
results of operations at and for the three and six months ended December 31,
1996 for FFY Financial Corp. and Subsidiary (Company).
Forward-Looking Statements
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 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.
Financial Condition
At December 31, 1996, assets totaled $582.3 million, an increase of $6.7
million, or 1.2%, during the six months ended December 31, 1996. The
increase in assets during the six months ended December 31, 1996 primarily
represents an increase in cash and cash equivalents of $20.1 million and
loan growth of $14.5 million partially offset by declines of $26.4 million
and $1.0 million in the securities portfolio and other assets, respectively.
Liabilities totaled $499.0 million at December 31, 1996, an increase of
$25.3 million, or 5.3%, during the six months ended December 31, 1996. The
increase in liabilities during the six months ended December 31, 1996
primarily represents an increase in deposit accounts and borrowed funds of
$4.2 million and $23.8 million, respectively, partially offset by a $3.1
million decline in other liabilities. There were modest changes in other
balance sheet categories during the six months ended December 31, 1996.
These aforementioned changes are discussed in detail below.
The Company's cash and cash equivalents increased $20.1 million during the
six months ended December 31, 1996 and totaled $28.3 million at December 31,
1996. The increase in cash and cash equivalents is primarily proceeds from
security sales and maturities not used to fund the Tender Offer (see Note B
of the Notes to Consolidated Financial Statements attached herein) as well
as the increase in deposits not used to fund loan growth. These funds were
invested in short-term repurchase agreements and term deposits during the
quarter ended December 31, 1996. Management intends to reinvest such funds
in higher-yield securities and future loan growth.
The Company's securities portfolio declined $26.4 million, or 24.0% during
the six months ended December 31, 1996 and totaled $83.5 million at December
31, 1996. The $26.4 million decline during the six months ended December
31, 1996 was due to the sale and maturity of securities totaling $38.7
million and $22.0 million, respectively, and principal receipts on mortgage-
backed securities totaling $2.7 million. These declines were partially
offset by security purchases, predominantly adjustable-rate mortgage-backed
securities, totaling $35.5 million and an increase in the market value of
the securities portfolio from an unrealized loss of $1.3 million at June 30,
1996 to an unrealized gain of $245,000 at December 31, 1996. The decline in
the securities portfolio during the six months ended December 31, 1996
funded the Tender Offer as well as contributing to the increase in cash and
cash equivalents, both mentioned above.
Net loans receivable increased $14.5 million, or 3.3% during the six months
ended December 31, 1996 and totaled $453.3 million at December 31, 1996. The
$14.5 million increase in net loans receivable during the six months ended
December 31, 1996 was mainly attributable to an increase in one-to-four
family loans of $10.1 million and consumer loans of $4.0 million. The $4.0
million increase in consumer loans was attributable to increases of $2.5
million and $1.7 million in indirect auto loans and home equity loans,
respectively, partially offset by a minor decrease in other consumer
lending. Although the Bank's indirect auto lending portfolio increased
during the six months ended December 31, 1996, this portfolio declined
during the quarter ended December 31, 1996 from $12.3 million at September
30, 1996 to $11.4 million at December 31, 1996. The Bank wrote off $200,000
in indirect auto loans during the current quarter and nonperforming indirect
auto loans increased from $493,000 at September 30, 1996 to $1.1 million at
December 31, 1996. The Bank began the indirect auto loan program in January
1996 in an effort to develop a share in the local market for such lending.
The $1.1 million in nonperforming indirect auto loans at December 31, 1996
were originated prior to September 15, 1996, when underwriting standards on
these loans were tightened in response to the performance of the portfolio.
Since that time, originations have slowed considerably, from an average of
$1.7 million per month from January 1996 through September 15, 1996, to an
average of $205,000 per month through December 1996. Collection efforts on
these loans have also been increased.
Loan originations during the six months ended December 31, 1996 totaled
$63.4 million compared to $56.0 million during the same period last year.
One-to-four family loans totaled $39.8 million or 62.8% of originations,
multi-family residential, commercial real estate and development loans
totaled $4.1 million or 6.5% of originations and consumer loans totaled
$19.5 or 30.7% or originations. The Bank focuses on originating a portion
of its one-to-four family loans as adjustable-rate mortgages (ARMs) in an
attempt to reduce interest rate risk. However, market conditions, including
increased competition and generally low market interest rates continued to
inhibit the marketability of ARMs. Adjustable-rate originations totaled
$11.2 million, or 17.8% of originations during the six months ended December
31, 1996. At December 31, 1996, adjustable-rate loans represented 18.8% of
the gross loan portfolio.
The Bank has historically been a portfolio lender, however, management is
currently putting in place a secondary market mortgage lending operation
through origination and sale of qualifying loans to Federal National
Mortgage Association (FNMA) in an effort to access that portion of the
mortgage market that is currently serviced by secondary market lenders.
Management believes that the operational efficiencies existing in the
portfolio lending operations will allow the Bank to be competitive in the
secondary market. The application process with FNMA is complete and
management anticipates that the Bank will begin selling loans during fiscal
year 1997.
The allowance for loan losses totaled $3.5 million at December 31, 1996,
compared to $3.4 million at June 30, 1996. During the six months ended
December 31, 1996, there were $353,000 in additional reserves charged to
operations partially offset by $286,000 in net write-offs, of which $210,000
were in the indirect auto loan portfolio. The $3.5 million allowance at
December 31, 1996 represented .6% of total assets and .8% of net loans
receivable. Non-performing assets, including non-performing loans, troubled
debt restructurings and foreclosed assets (real estate owned), totaled $5.0
million at December 31, 1996 compared to $4.7 million at June 30, 1996. The
allowance for loan losses as a percentage of non-performing assets totaled
70.4% and 73.6% at December 31, 1996 and June 30, 1996, respectively.
Deposits increased $4.2 million, or 0.9% during the six months ended
December 31, 1996 from $456.5 million at June 30, 1996. Certificate and NOW
account deposits increased $8.0 million and $2.3 million, respectively,
during the six month period. The largest changes in certificate types were
an increase of $18.6 million in 17-month accounts partially offset by
decreases of $4.3 million, $1.5 million and $4.4 million in 12-month, 18-
month and 36-month accounts, respectively. Passbook and money market
accounts declined $3.9 million and $2.2 million, respectively, during the
six month period. The variety of deposit accounts offered by the Bank has
allowed it to be competitive in obtaining funds and to respond with
flexibility to changes in consumer demand. The Bank has become more
susceptible to short-term fluctuations in deposit flows, as customers have
become more interest rate conscious. At December 31, 1996, certificate
accounts totaled $295.1 million, passbook accounts totaled $110.3 million,
NOW and checking accounts totaled $30.5 million and money market accounts
totaled $24.8 million.
Securities sold under agreements to repurchase (repurchase agreements)
increased $249,000 during the six months ended December 31, 1996 and totaled
$6.9 million at December 31, 1996. Securities underlying the agreements are
U.S. Government and federal agency obligations. These repurchase agreements
mature overnight. The repurchase agreements are treated as financings, and
the obligations to repurchase securities sold are reflected as a liability
in the consolidated statements of financial condition. The securities,
although held in safekeeping outside the Bank, remain in the asset accounts.
The Bank enters into the repurchase agreements as a source of funds,
particularly due to the recent history of deposit declines, to provide for
continued loan growth.
The Company's borrowed funds increased $23.8 million during the six months
ended December 31, 1996 and totaled $25.0 million at December 31, 1996. As
part of a wholesale growth strategy, the Bank borrowed $25.0 million from
Federal Home Loan Bank (FHLB) to purchase adjustable-rate mortgage-backed
securities (see above). This growth strategy is designed to enable the
Company to leverage its excess capital, and will be managed within the
Company's guidelines for asset/liability management, profitability and
overall growth objectives. There was $1.2 million in borrowed funds
outstanding at June 30, 1996.
Other payables and accrued expenses decreased $3.1 million during the six
months ended December 31, 1996 and totaled $3.9 million at December 31,
1996. The $3.1 million decline was primarily attributable to a $1.9 million
decline in conjunction with the Bank's official check remittance system (due
to customer demand) and the final Recognition and Retention Plan and Trust
(RRP) distribution that totaled $847,000.
Total stockholders' equity decreased $18.6 million, or 18.2% during the six
months ended December 31, 1996, from $101.9 million at June 30, 1996 to
$83.3 million at December 31, 1996. Largely contributing to the decline was
the $21.2 million stock repurchase mentioned above and dividends paid
totaling $1.5 million. These declines were partially offset by net income
for the six months ended December 31, 1996 totaling $1.4 million, a change
from a net unrealized loss of $869,000 at June 30, 1996 to a net unrealized
gain of $162,000 on securities available for sale, amortization and tax
benefits associated with employee benefits of $956,000, stock option
exercises of $432,000, and ESOP accounting pursuant to Statement of Position
(SOP) 93-6 totaling $307,000. Book value per share was $19.30 at December
31, 1996 compared to $20.06 at June 30, 1996.
Results of Operations
Interest income on loans totaled $9.7 million for the quarter ended December
31, 1996, an increase of $815,000, or 9.2%, compared to the quarter ended
December 31, 1995 due to a $36.8 million increase in the average balance of
loans outstanding, reflecting continued growth in the loan portfolio, and a
3 basis point increase in the weighted average yield on the portfolio, from
8.51% to 8.54%. Income from securities totaled $1.5 million for the quarter
ended December 31, 1996, a decrease of $467,000, or 24.1%, compared to the
quarter ended December 31, 1995. The decline was the result of a $36.8
million decline in average balances compared to the quarter ended December
31, 1995, partially offset by a 50 basis point increase in average yield,
from 5.98% to 6.48%. Income from other interest-earning assets totaled
$392,000 for the quarter ended December 31, 1996, an increase of $352,000
over the same prior year quarter. This increase was primarily due to funds
generated from security sales and maturities not used to finance the Tender
Offer (see Note B of the Notes to Consolidated Financial Statements attached
herein) that were invested in short-term repurchase agreements and term
deposits. These repurchase agreements and term deposits matured in December
1996 and the proceeds will be used to fund future loan growth or will be re-
invested in higher-yield securities.
Interest income on loans totaled $19.1 million for the six months ended
December 31, 1996, an increase of $1.7 million, or 9.7%, compared to the six
months ended December 31, 1995 due to a $38.2 million increase in the
average balance of loans outstanding, reflecting continued growth in the
loan portfolio, and a 2 basis point increase in the weighted average yield
on the portfolio, from 8.52% to 8.54%. Income from securities totaled $3.1
million for the six months ended December 31, 1996, a decrease of $852,000,
or 21.7%, compared to the six months ended December 31, 1995. The decline
was the result of a $33.8 million decline in average balances compared to
the six months ended December 31, 1995, partially offset by a 41 basis point
increase in average yield, from 5.93% to 6.34%. Income from other interest-
earning assets totaled $434,000 for the six months ended December 31, 1996,
an increase of $220,000 over the same prior year six-month period primarily
due to funds not used to finance the Tender Offer being invested in short-
term repurchase agreements and term deposits.
Interest expense on deposits during the quarter ended December 31, 1996
totaled $5.5 million, a decrease of $29,000, or 0.5% compared to the quarter
ended December 31, 1995, due to a $1.8 million decline in the average
balance of deposits and a 1 basis point decline in the average cost of
deposit accounts, from 4.88% to 4.87%. Interest expense associated with
repurchase agreements totaled $71,000 during the quarter ended December 31,
1996 with an average balance of $6.8 million and a weighted average rate of
4.18%. There was no interest expense on repurchase agreements during the
quarter ended December 31, 1995, since the Bank did not begin to enter into
such agreements until May 1996. Interest expense on borrowed funds totaled
$344,000 during the quarter ended December 31, 1996, an increase of $331,000
compared to the quarter ended December 31, 1995, due to a $24.1 million
increase in the weighted average balance of borrowings (see "Financial
Condition" above) partially offset by a 30 basis point decline in the
average cost of borrowings, from 5.80% to 5.50%.
Interest expense on deposits during the six months ended December 31, 1996
totaled $10.9 million, a decrease of $209,000, or 1.9%, compared to the six
months ended December 31, 1995, due to a $4.5 million decline in the average
balance of deposits and a 5 basis point decline in the average cost of
deposit accounts, from 4.88% to 4.83%. Interest expense associated with
repurchase agreements totaled $157,000 during the six months ended December
31, 1996 with an average balance of $7.5 million and a weighted average rate
of 4.20%. Interest expense on borrowed funds totaled $403,000 during the
six months ended December 31, 1996, an increase of $390,000 compared to the
six months ended December 31, 1995, due to a $14.2 million increase in the
weighted average balance of borrowings (see "Financial Condition" above)
partially offset by a 32 basis point decline in the average cost of
borrowings, from 5.80% to 5.48%.
The provision for loan losses totaled $198,000 and $353,000 for the three
and six months ended December 31, 1996, respectively, compared to $73,000
and $149,000 for the same periods last year based on management's continuing
assessment of the loan portfolio and management's desire to maintain the
allowance for loan losses at a level considered adequate to provide for
probable future loan losses. The $125,000 and $204,000 increases over last
year principally reflect the performance of the Bank's indirect auto lending
portfolio. The Bank wrote-off $200,000 in indirect auto loans during the
quarter ended December 31, 1996 and nonperforming indirect auto loans
increased from $493,000 at September 30, 1996 to $1.1 million at December
31, 1996. The $1.1 million in nonperforming indirect auto loans at December
31, 1996 were originated prior to September 15, 1996, when underwriting
standards on these loans were tightened in response to the performance of
the portfolio. Since that time, originations have slowed considerably, from
an average of $1.7 million per month from January 1996 through September 15,
1996, to an average of $205,000 per month through December 1996.
Collection efforts on these loans have also been increased. Future
additions to the allowance for loan losses will be dependent on a number of
factors, including the performance of the Bank's loan portfolio, the
economy, changes in interest rates and the effect of such changes on real
estate values, inflation and the view of regulatory authorities toward
adequate reserve levels.
Non-interest income, excluding gain on sale of securities, totaled $220,000
for the quarter ended December 31, 1996, a decrease of $58,000 compared to
the same period last year. The decrease was primarily attributable to
declines in credit life and check commissions income, other service fee
income and safety deposit box rentals. For the six months ended December
31, 1996, non-interest income, excluding gain/(loss) on sale of securities,
totaled $439,000, a decrease of $95,000 from $533,000 compared to the same
period last year. The decrease was primarily attributable to declines in
application fee income, ATM service fee income, credit life commission
income, other service fee income and safety deposit box rentals.
Gain on sale of securities totaled $173,000 for the quarter ended December
31, 1996, compared to $17,000 for the same period last year. On September
30, 1996, management decided to sell $28.8 million in available for sale
securities for liquidity or reinvestment purposes. The Company recorded a
loss on sale of securities for the write-down to fair value for other-than-
temporary impairment when the decision to sell such securities was made. In
early October 1996, the sale of these designated securities was completed
and as a result of a market increase from September 30, 1996 to the actual
sale dates, a $115,000 gain was booked for these securities. In December
1996, the Company sold additional securities with an amortized cost of $8.3
million to help fund the Tender Offer and resulted in an additional $58,000
gain. During the three months ended December 31, 1995, the Company sold
securities with an amortized cost of $5.0 million primarily to fund loan
originations which resulted in a $17,000 gain.
Loss on sale of securities totaled $370,000 for the six months ended
December 31, 1996, compared to a $17,000 gain for the same period last year
(see above). The $370,000 loss resulted from a $516,000 other-than-
temporary impairment loss partially offset by a $115,000 gain on sale of the
impaired securities and a net gain of $31,000 in other security sales for
the current six-month period. Refer to the above paragraph for more detail
regarding the impairment loss and subsequent sale of such securities.
Non-interest expense totaled $3.0 million for the quarter ended December 31,
1996, an increase of $157,000 compared to the quarter ended December 31,
1995. Salaries and employee benefit expenses totaled $1.6 million for the
current quarter, an increase of $111,000 from the prior year period. This
increase was attributable to increased salary, bonus and payroll tax
expenses totaling $69,000, an increase in ESOP expense pursuant to SOP 93-6
of $24,000, increased medical claims of $14,000, expenses associated with
the termination of a Supplemental Executive Retirement Plan (SERP) of
$15,000 and a decrease in loan costs deferred of $22,000 due to a decline in
the number of loans closed. These increases were partially offset by a
$39,000 decline in pension expense (see below). Net occupancy expenses
totaled $189,000 for the quarter ended December 31, 1996, an increase of
$17,000 from the prior year period primarily attributable to increased rent
and utilities associated with two new offices and more miscellaneous repair
and maintenance items. Insurance and bonding expenses totaled $257,000 for
the current quarter, a decline of $66,000 from the prior year period mainly
attributable to a $58,000 refund from the Federal Deposit Insurance
Corporation (FDIC) associated with reduced premium after the one-time SAIF
assessment paid in November 1996. Other expenses totaled $489,000 for the
quarter ended December 31, 1996, an increase of $98,000 from the prior year
period. Increases of $18,000 in professional services (primarily
attributable to strategic planning services), $12,000 in security and
security-related services (more offices and automated teller machine related
services), $30,000 in fees associated with the repurchase agreement, $15,000
in loan expenses (primarily in vehicle repossessions), $10,000 in
contributions and $21,000 in supplies and printing services all contributed
to the $98,000 increase. There were modest changes in other non-interest
expense categories.
Non-interest expense totaled $9.0 million for the six months ended December
31, 1996, an increase of $3.2 million compared to the six months ended
December 31, 1995. Salaries and employee benefit expenses totaled $3.0
million for the current six-month period, an increase of $98,000 from the
same period last year. This increase was attributable to increased salary,
bonus and payroll tax expenses totaling $110,000, an increase in ESOP
expense pursuant to SOP 93-6 of $34,000, expenses associated with the
termination of a Supplemental Executive Retirement Plan (SERP) of $15,000
and a decrease in loan costs deferred of $22,000 due to a decline in the
number of loans closed. These increases were partially offset by a $77,000
decline in pension expense (see below) and decreased medical claims of
$6,000. Net occupancy expenses totaled $373,000 for the six months ended
December 31, 1996, an increase of $30,000 from the prior year period
primarily attributable to increased rent and utilities associated with two
new offices and more miscellaneous repair and maintenance items, mainly
concrete and glass repairs. Insurance and bonding expenses totaled $3.6
million for the current six-month period, an increase of $2.9 million from
the prior year period mainly attributable to a $3.0 million one-time SAIF
assessment booked in September 1996. State and local taxes totaled $539,000
for the current six-month period, an increase of $14,000 from the prior year
period due to increased equity at the subsidiary level. Other expenses
totaled $986,000 for the six months ended December 31, 1996, an increase of
$89,000 from the prior year period. Increases of $20,000 in security and
security-related services (more offices and automated teller machine related
services), $60,000 in fees associated with the repurchase agreement and
$16,000 in loan expenses (primarily in vehicle repossessions) all
contributed to the $89,000 increase. There were modest changes in other
non-interest expense categories.
A review of salary and benefits expense, specifically retirement costs,
indicated that the Bank's retirement expense was significantly higher than
financial institution industry averages, primarily due to the required
Employee Stock Ownership Plan (ESOP) accounting change that was adopted in
fiscal year 1995. The accounting change caused ESOP expense to be recorded
at the market value of Holding Company shares, not the original $10 cost per
share as was allowed under previous accounting. In order to reduce
retirement costs, the board of directors approved termination of the
existing defined benefit pension plan as of November 15, 1996,
implementation of a 401(k) plan effective January 1, 1997 and, subject to
approval by the Internal Revenue Service (IRS), restructuring of the ESOP
loan. The termination of the defined benefit pension plan resulted in no
pension expense for the three and six months ended December 31, 1996,
compared to $39,000 and $77,000 for the three and six months ended December
31, 1995, respectively, and is expected to generate cost savings of
approximately $156,000 before tax annually. Cost savings associated with
restructuring the ESOP loan, although expected to be approximately $450,000
before tax in the first year and average $256,000 before tax per year over
the remaining 17 year term of the proposed restructured loan, have not been
reflected in the results for the three and six months ended December 31,
1996, as the restructuring is dependent upon IRS approval. Cost savings
will be reflected in the Company's financial statements when, and if, the
IRS approves the change. No assurance can be given as to whether the IRS
will approve the restructuring.
Federal income tax expense totaled $940,000 for the three months ended
December 31, 1996, an increase of $22,000 compared to the same period last
year due to increased income before federal income taxes. For the six
months ended December 31, 1996, federal income tax expense was $647,000, a
decrease of $1.1 million for the same period last year. This decline is
primarily due to reduced net income before taxes, mainly the result of the
one-time SAIF assessment.
Effect of New Accounting Standards
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 establishes the accounting for
certain financial asset transfers, including securitization transactions,
and will become effective for transactions entered into on or after January
1, 1997. Management does not expect the implementation of SFAS No. 125 to
have a material impact on the Company's consolidated financial position or
results of operations.
Liquidity
In general terms, liquidity is a measurement of the Company's ability to
meet its cash needs. For example, the Company's objective 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 principal sources of funds are
deposits, amortization and prepayments of loans, maturities, sales and
principal receipts of securities, operations and borrowings.
All savings institutions, including the Bank, are required by federal
regulation to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
This liquid asset ratio may vary from time to time depending on economic
conditions and savings flows of all savings institutions. Currently, the
minimum liquid asset ratio is 5%. In addition, short-term liquid assets
(e.g., cash, certain time deposits, certain banker's acceptances and short-
term U.S. Government obligations) currently must constitute at least 1% of
the Bank's average daily balance of net withdrawable deposit accounts and
current borrowings. Penalties may be imposed for violations of either
liquid assets ratio requirement. At December 31, 1996 and 1995, the Bank
was in compliance with both requirements, with overall liquid asset ratios
of 7.7% and 13.5%, respectively, and short-term liquid asset ratios of 3.7%
and 5.8%, respectively. The decrease in the overall liquid asset ratio from
the December 31, 1995 level reflects implementation of the leverage strategy
and the use of security sales and maturities to fund loan originations
during the past year. The Bank intends to maintain higher than required
levels of liquidity, but will continue to reduce these ratios as lending
opportunities become available.
Capital Resources
Federal regulations require savings institutions to maintain certain minimum
levels of regulatory capital. Regulations require tangible capital divided
by total adjusted assets to be at least 1.5%. The regulations also require
core capital divided by total adjusted assets to be at least 3.0%, and risk-
based capital divided by risk-weighted assets must be at least 8.0%. The
regulations define tangible, core and risk-based capital as well as total
adjusted assets and risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was
signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19,
1992. The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized." To be considered "well capitalized", an
institution must generally have a leverage capital ratio of at lease 5%, a
Tier-1 risk-based capital ratio of at least 6%, and a total risk-based
capital ratio of at least 10 %.
At December 31, 1996, the Bank was in compliance with regulatory capital
requirements and is considered "well capitalized" as set forth below:
Core/ Tier-1 Total
Equity Tangible Leverage Risk-Based Risk-Based
(dollars in thousands) Capital Capital Capital Capital Capital
- ---------------------------------------------------------------------------------------------------------
GAAP Capital $ 55,428 $ 55,428 $ 55,428 $ 55,428 $ 55,428
Unrealized appreciation or gain on
securities available for sale, net (6) (6) (6) (6)
General loan valuation allowances - - - 3,224
-------------------------------------------
Regulatory capital 55,422 55,422 55,422 58,646
Total assets 558,288
Adjusted total assets 558,481 558,451
Risk-weighted assets 335,596 335,596
------------------------------------------------------
Capital ratio 9.9% 9.9% 9.9% 16.5% 17.5%
Regulatory capital category
Well capitalized - equal to or greater than 5.0% 6.0% 10.0%
- -------------------------------------------------------------------------------------------------------
Recent Developments
On August 20, 1996, the Small Business Job Protection Act of 1996 was signed
into law which, among other things, effects thrift institutions such as the
Bank regarding bad debt provisions. Large thrifts (see below) must switch
to the specific charge-off method of Internal Revenue Code (IRC) Section 166
while small thrifts must switch to the reserve method of IRC Section 585
(the method currently used by small commercial banks). Under the specific
charge-off method for large thrifts, charge-offs are deducted and recoveries
are taken into taxable income as incurred. This bill eliminates the
percentage of taxable income method for computing additions to the thrift
tax bad debt reserves for tax years beginning after December 31, 1995. This
will effect the Bank beginning in the current fiscal year ending June 30,
1997. The bill also requires that thrift institutions such as the Bank
recapture all or a portion of their tax bad debt reserves added since the
base year. For the Bank, the base year is June 30, 1988 and the tax bad
debt reserves added since that date are $3.4 million. The amount of the
reserves to be recaptured depends upon whether the institution is considered
a large institution for tax purposes. A small thrift is required to
recapture the portion of its reserves that exceeds the greater of (1) the
experience method reserve computed as if the thrift had always been a small
bank, or (2) the lessor of the qualifying and non-qualifying base year
reserves or the contracted base year reserves. The opening tax bad debt
reserve for a small thrift for the first taxable year beginning after
December 31, 1995 is the greater of the two amounts described in (1) and (2)
above. A small thrift that switches to the Section 585 experience method
must make an annual addition to its reserve for bad debts. Under the
repealed Section 593, a thrift was not required to make a minimum addition
to its reserve for any taxable year.
An institution is considered large if the quarterly average of the
institution's (or the consolidated group's) total assets exceeds $500
million for the year. The Bank is considered a large institution and is
required to recapture the excess of its bad debt reserves beginning in
fiscal year 1997 and to continue such recapture ratably over a six year
period. However, postponement of the recapture is possible for a two year
period and will generally allow institutions, such as the Bank, to suspend
such recapture for the first two years. In order to postpone the bad debt
reserve recapture, the Bank must meet a minimum level of mortgage lending
activity for those years. The level of mortgage lending activity needed to
qualify for this suspension is the institution's average mortgage lending
activity for the six taxable years preceding 1996 adjusted for inflation.
For this purpose, only home purchase and home improvement loans qualify
(refinancing and home equity loans do not qualify) and financial
institutions can elect to have the tax years with the highest and lowest
lending activity removed from the average calculation.
On December 11, 1996, the Federal Deposit Insurance Corporation (FDIC) board
of directors finalized a rule lowering the rates on assessments paid to the
Savings Association Insurance Fund (SAIF), effective October 1, 1996. As a
result of the Deposit Insurance Funds Act (Funds Act), the SAIF was
capitalized up to the Designated Reserve Ratio (DRR) of 1.25 percent of
estimated insured deposits on October 1, 1996. The FDIC's board also
established a process similar to that which was applied to the Bank
Insurance Fund (BIF) for adjusting rate schedules for both the SAIF and the
BIF within a limited range without notice and comment to maintain each of
the fund balances at the target DRR. Effective January 1, 1997, the Funds
Act also separates the Financing Corporation (FICO) assessment to service
the interest on its bond obligations from the SAIF assessment. FICO
assessment rates for the first semiannual period of 1997 were set at 1.30
basis points annually for BIF-assessable deposits and 6.48 basis points
annually for SAIF-assessable deposits. The FICO rate on BIF-assessable
deposits must be one-fifth the rate on SAIF-assessable deposits until the
insurance funds are merged or until January 1, 2000, whichever comes first.
Based on deposit levels at December 31, 1996, the Bank can expect annual
savings of approximately $500,000 after tax as a result of the lower deposit
insurance premiums.
PART II: OTHER INFORMATION
FFY FINANCIAL CORP.
DECEMBER 31, 1996
Item 1. Legal Proceedings
The Holding Company is not a party to any material legal proceeding
before any court or regulatory authority, administrative agency or other
tribunal. Further, the Holding Company is not aware of the threat of any
such proceeding.
As part of its ordinary course of business, the Bank is a party to
several lawsuits involving a variety of claims including the collection of
delinquent accounts. No litigation is pending or, to the Bank's knowledge,
threatened in which the Bank faces potential loss or exposure which would
have a material impact on its financial condition or results of operations.
The 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 16, 1996, 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 4,113,508 49,291 -0-
Myron S. Roh 4,030,118 132,680 -0-
Ronald P. Volpe 4,028,674 134,125 -0-
Ratification of the Appointment of Auditors for the fiscal year ended June
30, 1997:
BROKER
NAME FOR AGAINST ABSTAIN NON-VOTES
---- --- ------- ------- ---------
KPMG Peat Marwick LLP 4,021,497 107,453 34,281 -0-
Item 5. Other Information
Kenneth C. Schafer retired as a director of the Company effective
October 16, 1996. Mr. Schafer was a director for 36 years.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits - Exhibit 27-Financial Data Schedule
B. Reports on Form 8-K
On October 15, 1996, the Registrant announced a net loss of
($496,000), or ($.10) per share for the quarter ended September 30, 1996, an
increase in the regular dividend from $.15 per share to $.175 per share and
the board of director approval to terminate the existing defined benefit
pension plan and implement a 401(k) plan.
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 14, 1997 By: /s/ Jeffrey L. Francis
----------------------------------------
Jeffrey L. Francis
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 1997 By: /s/ Therese Ann Liutkus
----------------------------------------
Therese Ann Liutkus
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)