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 March 31, 1997
[ ] 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 APRIL 30, 1997
----- ------------------------------------
common stock, $.01 par value 4,183,169
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
Part II. Other Information:
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults on Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31,
1997 June 30,
(Unaudited) 1996
------------ ------------
ASSETS
- ------
Cash $ 3,281,786 $ 3,374,031
Interest-bearing deposits 5,714,253 4,888,366
Short-term investments 2,640,000 0
----------------------------
TOTAL CASH AND CASH EQUIVALENTS 11,636,039 8,262,397
Securities available for sale 115,291,282 109,835,614
Loans receivable 454,729,876 438,789,657
Interest and dividends receivable on securities 1,332,485 1,845,835
Interest receivable on loans 2,379,644 2,312,575
Federal Home Loan Bank stock, at cost 3,975,600 3,773,800
Office properties and equipment 7,806,541 7,973,576
Real estate owned 20,967 0
Other assets 1,494,121 2,808,873
----------------------------
TOTAL ASSETS $598,666,555 $575,602,327
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $447,789,339 $456,540,807
Short-term securities sold under agreements to repurchase 9,576,280 6,639,553
Long-term securities sold under agreements to repurchase 25,000,000 0
Borrowed funds 21,500,000 1,200,000
Advance payments by borrowers for taxes and insurance 1,104,794 2,279,624
Other payables and accrued expenses 9,306,023 7,021,490
----------------------------
TOTAL LIABILITIES 514,276,436 473,681,474
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 4,328,219 shares at March 31, 1997
and 5,081,198 shares at June 30, 1996 66,300 66,300
Additional paid-in capital 64,140,823 63,529,201
Retained earnings, substantially restricted 73,257,317 72,165,978
Treasury stock, at cost, 2,301,781 shares at
March 31, 1997 and 1,548,802 shares at June 30, 1996 (48,643,282) (28,492,183)
Unrealized loss on securities available for sale, net (601,797) (869,461)
Common stock purchased by:
Employee stock ownership plan (3,547,452) (3,865,692)
Recognition and retention plans (281,790) (613,290)
----------------------------
TOTAL STOCKHOLDERS' EQUITY 84,390,119 101,920,853
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $598,666,555 $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 Nine months ended
March 31, March 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
INTEREST INCOME
Mortgage loans $ 8,383,185 $ 8,008,829 $24,943,668 $23,626,325
Consumer and other loans 1,162,874 963,460 3,746,465 2,799,866
Securities available for sale 1,629,984 1,850,923 4,712,721 5,411,404
Securities held to maturity 0 0 0 374,084
Federal Home Loan Bank stock 68,619 64,558 204,921 192,068
Other interest-earning assets 173,568 55,901 608,030 270,782
--------------------------------------------------------
TOTAL INTEREST INCOME 11,418,230 10,943,671 34,215,805 32,674,529
--------------------------------------------------------
INTEREST EXPENSE
Deposit accounts 5,466,494 5,492,660 16,400,602 16,635,944
Short-term securities sold under agreements to repurchase 74,594 0 231,225 0
Long-term securities sold under agreements to repurchase 173,680 0 173,680 0
Borrowed funds 306,429 15,510 708,955 28,504
--------------------------------------------------------
TOTAL INTEREST EXPENSE 6,021,197 5,508,170 17,514,462 16,664,448
NET INTEREST INCOME 5,397,033 5,435,501 16,701,343 16,010,081
Provision for loan losses 208,128 76,555 561,158 225,651
--------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,188,905 5,358,946 16,140,185 15,784,430
--------------------------------------------------------
NON-INTEREST INCOME
Service charges 135,037 123,588 404,660 393,627
Gain (loss) on sale of securities 24,035 4,180 (345,641) 20,957
Other 96,730 144,300 265,696 407,629
--------------------------------------------------------
TOTAL NON-INTEREST INCOME 255,802 272,068 324,715 822,213
--------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,426,214 1,865,370 4,441,940 4,783,215
Net occupancy 174,861 200,100 547,555 542,351
Insurance and bonding 125,417 322,594 3,712,770 967,193
State and local taxes 269,774 262,253 808,825 787,015
Depreciation 220,395 239,826 686,445 712,923
Other 430,023 373,096 1,416,489 1,270,508
--------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 2,646,684 3,263,239 11,614,024 9,063,205
--------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 2,798,023 2,367,775 4,850,876 7,543,438
FEDERAL INCOME TAX EXPENSE 887,000 790,000 1,534,000 2,538,000
--------------------------------------------------------
NET INCOME $ 1,911,023 $ 1,577,775 $ 3,316,876 $ 5,005,438
========================================================
EARNINGS PER SHARE $ 0.47 $ 0.32 $ 0.72 $ 0.98
========================================================
CASH DIVIDENDS DECLARED PER SHARE $ 0.175 $ 0.15 $ 0.525 $ 0.45
========================================================
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)
Nine months ended
March 31,
1997 1996
------------ ------------
Balance at July 1, $101,920,853 $106,400,098
Net income 3,316,876 5,005,438
Dividends paid, $.50 and $.425 per share, respectively (2,225,537) (2,088,408)
Treasury stock purchased (21,176,586) (5,902,645)
Stock options exercised 526,060 343,690
Amortization of ESOP expense 318,240 332,010
Amortization of RRP stock awards 331,500 509,064
Tax benefit related to RRP stock awards 222,493 166,040
Tax benefit related to exercise of stock options 419,712 38,404
Difference between average fair value per share and
cost per share on ESOP shares committed to be released 468,844 378,999
Change in unrealized loss on securities
available for sale, net 267,664 (20,662)
----------------------------
$ 84,390,119 $105,162,028
============================
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)
Nine months ended
March 31,
1997 1996
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 9,252,706 $ 9,482,457
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available for sale 26,000,000 44,000,000
Proceeds from sales of securities available for sale 43,659,205 5,071,055
Purchase of securities available for sale (80,508,340) (22,837,089)
Principal receipts on securities available for sale 5,231,082 1,915,260
Net increase in loans (16,142,102) (23,455,274)
Purchase of office properties and equipment (532,795) (728,184)
Other, net 14,461 25,122
----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (22,278,489) 3,990,890
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposit accounts (8,524,379) (3,007,165)
Net increase in short-term securities sold under agreements to repurchase 2,936,727 0
Net increase in long-term securities sold under agreements to repurchase 25,000,000 0
Net increase in short-term borrowings 20,300,000 0
Net increase (decrease) in amounts due to bank (1,293,020) 215,443
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 1,375,844 (861,694)
Treasury stock purchases (21,176,586) (5,902,645)
Dividends paid (2,225,537) (2,088,408)
Other, net 6,376 (243,016)
----------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 16,399,425 (11,887,485)
----------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,373,642 1,585,862
CASH AND CASH EQUIVALENTS
Beginning of period 8,262,397 11,734,251
----------------------------
End of period $ 11,636,039 $ 13,320,113
============================
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 nine months ended March 31, 1997 and
1996. 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 nine months ended March 31, 1997 were 4,099,490 and 4,621,332,
respectively. The weighted average number of shares of common stock and
common stock equivalents outstanding during the three and nine months ended
March 31, 1996 were 4,989,737 and 5,096,800, respectively. Fully diluted
earnings per share is not significantly different than primary earnings per
share. See "Effect of New Accounting Standards" in Management's Discussion
and Analysis of Financial Condition and Results of Operation attached herein
for a brief explanation of Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share. The following tables disclose pro forma
earnings per share pursuant to SFAS No. 128 for the three months ended March
31, 1997 and 1996 and the nine months ended March 31, 1997 and 1996.
Three months ended March 31,
1997 1996
----------------------------------------- -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS
Income available to
common stockholders $1,911,023 3,926,182 $0.49 $1,577,775 4,743,108 $0.33
===== =====
Effect of Dilutive Securities
Stock options 0 140,521 0 214,170
---------- --------- ---------- ---------
Diluted EPS
Income available to
common stockholders $1,911,023 4,066,703 $0.47 $1,577,775 4,957,278 $0.32
========== ========= ===== ========== ========= =====
Nine months ended March 31,
1997 1996
----------------------------------------- -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS
Income available to
common stockholders $3,316,876 4,453,622 $0.74 $5,005,438 4,856,450 $1.03
===== =====
Effect of Dilutive Securities
Stock options 0 179,503 0 227,963
---------- --------- ---------- ---------
Diluted EPS
Income available to
common stockholders $3,316,876 4,633,125 $0.72 $5,005,438 5,084,413 $0.98
========== ========= ===== ========== ========= =====
Reclassifications:
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FFY FINANCIAL CORP.
MARCH 31, 1997
The following analysis discusses changes in the financial condition at and
for the nine months ended March 31, 1997 and results of operations for the
three and nine months ended March 31, 1997 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 March 31, 1997, assets totaled $598.7 million, an increase of $23.1
million, or 4.0%, during the nine months ended March 31, 1997. The increase
in assets during this period primarily represents increases in cash and cash
equivalents of $3.4 million, securities of $5.5 million and loan growth of
$15.9 million partially offset by a $1.3 million decline in other assets.
Liabilities totaled $514.3 million at March 31, 1997, an increase of $40.6
million, or 8.6%, during the nine months ended March 31, 1997. The increase
in liabilities during this period primarily represents increases in
securities sold under agreements to repurchase of $27.9 million and borrowed
funds of $20.3 million partially offset by a decline in deposit accounts of
$8.8 million. There were modest changes in other balance sheet categories
during the nine months ended March 31, 1997. The above mentioned changes
are discussed in detail below.
The Company's cash and cash equivalents totaled $11.6 million at March 31
1997, an increase of $3.4 million for the nine months ended March 31, 1997.
The increase in cash and cash equivalents is primarily funds invested in
open-end repurchase agreements (short-term investments).
The Company's securities portfolio totaled $115.3 million at March 31, 1997,
an increase of $5.5 million for the nine months ended March 31, 1997. The
$5.5 million increase was primarily attributable to $80.5 million in
security purchases, of which $66.0 were in the form of mortgage-backed
securities, partially offset by the sale and maturity of securities totaling
$44.0 million and $26.0 million, respectively, and principal receipts on
mortgage-backed securities totaling $5.2 million. Funds generated to
purchase the $80.5 million in securities for the nine months ended March 31,
1997 were mostly from borrowings, repurchase agreements and security
maturities.
Net loans receivable totaled $454.7 million at March 31, 1997, an increase
of $15.9 million, or 3.6% for the nine months ended March 31, 1997. The
$15.9 million increase in net loans receivable was mainly attributable to
increases in one-to-four family loans of $12.3 million, consumer loans of
$2.3 million and commercial loans of $1.4 million. The $2.3 million
increase in consumer loans was mainly attributable to an increase in the
home equity loan portfolio. The Bank's indirect auto lending portfolio
totaled $10.3 million at March 31, 1997. The indirect auto loan program
began in January 1996 in an effort to develop a share in the local market
for such lending, however, after an analysis of the returns generated by the
existing portfolio and potential returns from such a line of business, the
Bank exited this business effective March 31, 1997.
Loan originations during the nine months ended March 31, 1997 totaled $87.9
million compared to $85.6 million during the same period last year. One-to-
four family loan originations totaled $56.2 million, or 64.0% of total
originations; multi-family residential, commercial real estate and
development loan originations totaled $5.8 million, or 6.6% of total
originations; and consumer loan originations totaled $25.9, or 29.4% of
total 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 $17.8
million, or 20.2% of total originations during the nine months ended March
31, 1997. At March 31, 1997, adjustable-rate loans represented 19.6% 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
designed to originate and sell 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, however management has
delayed the secondary market operation due to implementation and training on
the new loan origination software system (refer to "Changes in Financial
Condition" in the 1996 Annual Report to Shareholders). Management
anticipates that the Bank will begin selling loans during fiscal year 1998.
The allowance for loan losses totaled $3.2 million at March 31, 1997,
compared to $3.4 million at June 30, 1996. During the nine months ended
March 31, 1997, there were $839,000 in net write-offs, of which $711,000
were in the indirect auto loan portfolio, partially offset by $561,000 in
additional reserves charged to operations. The $3.2 million allowance at
March 31, 1997 represented .5% of total assets and .7% of net loans
receivable. Non-performing assets, including non-performing loans, troubled
debt restructurings and foreclosed assets (real estate owned), totaled $4.3
million at March 31, 1997 compared to $5.0 million, $5.1 million and $4.7
million at December 31, 1996, September 30, 1996 and June 30, 1996,
respectively. The allowance for loan losses as a percentage of non-
performing assets totaled 73.2% at March 31, 1997 compared to 70.4%, 70.0%
and 73.6% at December 31, 1996, September 30, 1996 and June 30, 1996,
respectively.
Other assets totaled $1.5 million at March 31, 1997, a decline of $1.3
million for the nine months ended March 31, 1997. The $1.3 million decline
is mainly attributable to the fourth and final distribution of the
Recognition and Retention Plan (RRP) trust assets totaling $811,000 net of
dividends and a $534,000 decrease in the deferred tax asset due to declines
in future deductible timing differences.
Deposit accounts totaled $447.8 million at March 31, 1997, a decline of $8.8
million or 1.9% for the nine months ended March 31, 1997. Certificate,
money market and passbook accounts declined $3.5 million, $2.9 million and
$4.7 million, respectively, whereas NOW and checking account deposits
increased $2.3 million for the nine months ended March 31, 1997. The
largest declines in certificate types were $5.8 million, $10.7 million and
$8.8 million in 12-month, 24-month and 36-month accounts, respectively.
These declines were partially offset by increases of $4.6 million and $18.6
million in 3-month and 17-month accounts, respectively. The 1.2% decline in
certificate accounts primarily represent brokered accounts that matured
during the quarter ended March 31, 1997 that were not reinvested in the Bank
as customers seek higher yields in this generally low market interest rate
environment. However, 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 March 31, 1997, certificate
accounts totaled $283.6 million, passbook accounts totaled $109.6 million,
NOW and checking accounts totaled $30.5 million and money market accounts
totaled $24.1 million.
Securities sold under agreements to repurchase (repurchase agreements)
totaled $34.6 million, an increase of $27.9 million for the nine months
ended March 31, 1997. On February 19, 1997, the Bank entered into a fixed-
rate, long-term repurchase agreement for $25,000,000. This repurchase
agreement has a term of five years bearing an interest rate of 6.1%,
however, the third party has an option to terminate the agreement after
three years and on any 90-day anniversary following the initial three years.
The proceeds were used to purchase securities, enabling the Company to
further leverage its excess capital. Securities underlying the long-term
repurchase agreement are Federal Home Loan Mortgage Corporation (FHLMC) and
Government National Mortgage Association (GNMA) mortgage-backed securities.
Also contributing to the $27.9 million increase was $2.9 million in
additional funds utilized by the Bank to fund deposit outflows. These
short-term repurchase agreements mature overnight. Securities underlying
the short-term repurchase agreement are U.S. Government and federal agency
obligations. Both 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 Company's borrowed funds totaled $21.5 million at March 31, 1997, an
increase of $20.3 million for the nine months ended March 31, 1997. The
Bank borrowed $25.0 million from Federal Home Loan Bank (FHLB) to purchase
adjustable-rate mortgage-backed securities during the second fiscal quarter
of 1997 and subsequently repaid $3.5 million back to FHLB. The borrowings
enabled the Company to leverage its 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.
Stockholders' equity totaled $84.4 million at March 31, 1997, a decrease of
$17.5 million or 17.2% for the nine months ended March 31, 1997. Largely
contributing to the decline was a $21.2 million Modified Dutch Auction
Tender Offer (Tender Offer) whereby the Holding Company purchased 808,000
shares at $26 per share. Included in the $21.2 million cost was
approximately $171,000 in expenses capitalized to treasury stock. The
Tender Offer commenced and expired during the second fiscal quarter of 1997.
Also contributing to the decline was cash dividends paid totaling $2.2
million. These declines were partially offset by net income for the nine
months ended March 31, 1997 totaling $3.3 million, a decline in the
unrealized loss on securities available for sale net of taxes totaling
$268,000, amortization and tax benefits associated with employee benefits of
$1.3 million, stock option exercises of $526,000, and ESOP accounting
pursuant to Statement of Position (SOP) 93-6 totaling $469,000. Book value
per share was $19.50 at March 31, 1997 compared to $20.06 at June 30, 1996.
On April 15, 1997, the Holding Company announced its intention to repurchase
5% of its outstanding shares, or 215,943 shares, in open market transactions
beginning April 21, 1997. The board of directors approved the repurchase
program in view of current economic and market factors, alternate investment
strategies and the strong capital position of the Company. The Company
believes that the repurchase of its shares represents an attractive
investment opportunity which will benefit the Company and its stockholders.
Results of Operations
Interest income on loans totaled $9.5 million for the quarter ended March
31, 1997, an increase of $574,000, or 6.4%, compared to the same quarter
last year. The increase was due to a $32.3 million increase in the average
balance of loans outstanding, reflecting continued growth in the loan
portfolio, partially offset by a 10 basis point decline in the weighted
average yield on the portfolio, from 8.53% to 8.43%. Income from securities
totaled $1.6 million for the quarter ended March 31, 1997, a decrease of
$221,000, or 11.9%, compared to the same quarter last year. The decrease
was the result of a $23.0 million decline in average balances compared to
the quarter ended March 31, 1996, partially offset by a 62 basis point
increase in average yield, from 6.01% to 6.63%. Income from other interest-
earning assets totaled $174,000 for the quarter ended March 31, 1997, an
increase of $118,000 over the same prior year quarter. This increase was
primarily due to funds generated from security sales and maturities during
the second fiscal quarter of 1997 that were invested in short-term open-end
repurchase agreements in anticipation of the Tender Offer. To the extent
these funds were not used in the Tender Offer, they were reinvested in
higher-yield securities during the current quarter.
Interest income on loans totaled $28.7 million for the nine months ended
March 31, 1997, an increase of $2.3 million, or 8.6%, compared to the nine
months ended March 31, 1996. The increase was due to a $36.2 million
increase in the average balance of loans outstanding, reflecting continued
growth in the loan portfolio, partially offset by a 2 basis point decrease
in the weighted average yield on the portfolio, from 8.52% to 8.50%. Income
from securities totaled $4.7 million for the nine months ended March 31,
1997, a decrease of $1.1 million, or 18.5%, compared to the nine months
ended March 31, 1996. The decline was the result of a $30.2 million decline
in average balances compared to the same prior year nine-month period,
partially offset by a 49 basis point increase in average yield, from 5.95%
to 6.44%. Income from other interest-earning assets totaled $608,000 for
the nine months ended March 31, 1997, an increase of $337,000 over the nine
months ended March 31, 1996. Refer to the previous paragraph for an
explanation of the source of funds that were invested in other interest-
earning assets.
Interest expense on deposits during the quarter ended March 31, 1997 totaled
$5.5 million, a decrease of $26,000, or 0.5%, compared to the same quarter
last year. The decrease was due to a $1.0 million decline in the average
balance of deposits and a 1 basis point decline in the average cost of
deposit accounts, from 4.81% to 4.80%. Interest expense associated with
repurchase agreements totaled $248,000 for the quarter ended March 31, 1997
with an average balance of $18.8 million and a weighted average rate of
5.29%. There was no interest expense on repurchase agreements during the
quarter ended March 31, 1996, since the Bank did not begin to enter into
such agreements until May 1996. Interest expense on borrowed funds totaled
$306,000 during the quarter ended March 31, 1997, an increase of $291,000
compared to the same quarter last year. This increase was due to a $21.6
million increase in the weighted average balance of borrowings partially
offset by a 73 basis point decline in the average cost of borrowings, from
6.15% to 5.42%.
Interest expense on deposits for the nine months ended March 31, 1997
totaled $16.4 million, a decrease of $235,000, or 1.4%, compared to the nine
months ended March 31, 1996. The decrease was due to a $3.4 million decline
in the average balance of deposits and a 3 basis point decline in the
average cost of deposit accounts, from 4.85% to 4.82%. Interest expense
associated with repurchase agreements totaled $405,000 for the nine months
ended March 31, 1997 with an average balance of $11.2 million and a weighted
average rate of 4.80%. Interest expense on borrowed funds totaled $709,000
for the nine months ended March 31, 1997, an increase of $680,000 compared
to the nine months ended March 31, 1996. The increase was due to a $16.7
million increase in the weighted average balance of borrowings partially
offset by a 74 basis point decline in the average cost of borrowings, from
6.20% to 5.46%.
The provision for loan losses totaled $208,000 and $561,000 for the three
and nine months ended March 31, 1997, respectively, compared to $77,000 and
$226,000 for the same periods last year based on management's continuing
assessment of the loan portfolio and its desire to maintain the allowance
for loan losses at a level considered adequate to provide for probable
future loan losses. The $131,000 and $335,000 increases over last year's
respective periods principally reflect the performance of the Bank's
indirect auto lending portfolio. The Bank wrote off $701,000 in indirect
auto loans over the past six months and nonperforming indirect auto loans
totaled $812,000 at March 31, 1997, down from $1.1 million at December 31,
1996 and an increase from $493,000 at September 30, 1996. After an analysis
of the returns generated by the existing portfolio and potential returns
from such a line of business, the Bank decided to cease indirect auto
lending effective March 31, 1997. Collection efforts on the remaining auto
loan portfolio have been increased, however, future additions to the
allowance for loan losses will be dependent on the performance of this
portfolio. Future additions to the allowance for loan losses will also be
dependent on a number of other factors, including the performance of the
Bank's total 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.
Loss on sale of securities totaled $346,000 for the nine months ended March
31, 1997, compared to a $21,000 gain for the same period last year. The
loss during the current fiscal year is primarily the result of securities
sold to fund the Tender Offer.
Non-interest expense totaled $2.6 million for the quarter ended March 31,
1997, a decrease of $617,000 compared to the quarter ended March 31, 1996.
Salaries and employee benefit expenses totaled $1.4 million for the current
quarter, a decline of $439,000 from the same prior year period. This
decline was mainly attributable to decreases of $368,000 in severance pay in
March 1996 for two executive officers who announced their retirement,
$133,000 in RRP expense as a result of the final distribution occurring on
December 30, 1996 (see Statement of Condition above) and $34,000 in pension
expense (see below). These decreases were partially offset by a $56,000
increase in salary and bonus for the quarter and a $52,000 decline in loan
costs deferred due to a decline in the number of loans closed. There were
modest changes in other salary and employee benefit categories. Insurance
and bonding expenses totaled $125,000 for the current quarter, a decline of
$197,000 from the same prior year period mainly attributable to decreased
premiums associated with the recapitalization of the Savings Association
Insurance Fund (SAIF). Other expenses totaled $430,000 for the current
quarter, an increase of $57,000 from the same prior year period. Increases
of $43,000 in advertising, $30,000 in fees associated with the short-term
repurchase agreement and $19,000 in loan expenses (primarily in vehicle
repossessions) partially offset by a decline of $34,000 in directors'
compensation pursuant to the final RRP distribution explained above all
contributed to the $57,000 increase. There were modest changes in other
non-interest expense categories.
Non-interest expense totaled $11.6 million for the nine months ended March
31, 1997, an increase of $2.6 million compared to the nine months ended
March 31, 1996. Salaries and employee benefit expenses totaled $4.4 million
for the current nine-month period, a decrease of $341,000 compared to the
same period last year. This decrease was primarily attributable to declines
of $368,000 in severance expense associated with the retirement of two
executive officers (see above), $111,000 in pension expense (see below),
$133,000 in RRP expenses (see above) and $36,000 in decreased medical
claims. These decreases were partially offset by increases of $165,000 in
salary, bonus and payroll tax expenses, $53,000 in ESOP expense pursuant to
SOP 93-6, $15,000 in costs associated with the termination of a Supplemental
Executive Retirement Plan and a decline of $74,000 in loan costs deferred
due to a decline in the number of loans closed. Insurance and bonding
expenses totaled $3.7 million for the current nine-month period, an increase
of $2.7 million from the same prior year period due primarily to the $3.0
million one-time assessment paid to recapitalize the SAIF. Other expenses
totaled $1.4 million for the nine months ended March 31, 1997, an increase
of $146,000 from the same prior year period. Increases of $58,000 in
advertising, $90,000 in fees associated with short-term repurchase agreement
and $36,000 in loan expenses (primarily in vehicle repossessions) partially
offset by a decline of $43,000 in directors' compensation (primarily RRP
expenses) all contributed to the $146,000 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 nine months ended March 31, 1997, compared
to $34,000 and $111,000 for the three and nine months ended March 31, 1997,
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 operating results for the three and nine months ended March 31, 1997, 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 $887,000 for the three months ended March
31, 1997, an increase of $97,000 compared to the same period last year due
to increased income before federal income taxes. For the nine months ended
March 31, 1997, federal income tax expense was $1.5 million, a decrease of
$1.0 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 (FASB) 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 is 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.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share which
supersedes Accounting Principles Board (APB) No. 15, Earnings per Share and
replaces the presentation of primary and fully diluted earnings per share
with basic and diluted earnings per share. SFAS No. 128 was issued to
simplify the computation of earnings per share and make the U.S. standard
more compatible with the earnings per share standards of other countries and
that of the International Accounting Standards Committee (IASC). SFAS No.
128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not
permitted, however, pro forma earnings per share is permitted for periods
prior to required adoption. See Note A of the Notes to Consolidated
Financial Statements attached herein for pro forma disclosures.
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 March 31, 1997 and 1996, the Bank was
in compliance with both requirements, with overall liquid asset ratios of
6.9% and 11.5%, respectively, and short-term liquid asset ratios of 4.2% and
5.6%, respectively. The decrease in the overall liquid asset ratio from the
March 31, 1996 level reflects the use of security sales and maturities to
fund loan originations during the past year.
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 least 5%, a
Tier-1 risk-based capital ratio of at least 6%, and a total risk-based
capital ratio of at least 10%.
At March 31, 1997, 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 $ 57,019 $ 57,019 $ 57,019 $ 57,019 $ 57,019
Unrealized depreciation or loss on
securities available for sale, net 550 550 550 550
General loan valuation allowances - - - 2,596
-----------------------------------------------
Regulatory capital 57,569 57,569 57,569 60,165
Total assets 578,725
Adjusted total assets 579,375 579,375
Risk-weighted assets 340,421 340,421
-----------------------------------------------------------
Capital ratio 9.9% 9.9% 9.9% 16.9% 17.7%
Regulatory capital category
Well capitalized - equal to or greater than 5.0% 6.0% 10.0%
- ------------------------------------------------------------------------------------------------------------
PART II: OTHER INFORMATION
FFY FINANCIAL CORP.
MARCH 31, 1997
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
None to be reported.
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 January 21, 1997, the Registrant announced earnings of $1.9 million, or
$.39 per share for the quarter ended December 31, 1996 and approval of the
regular quarterly dividend of $.175 per share.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FFY Financial Corp.
Date: May 14, 1997 By: /s/ Jeffrey L. Francis
---------------------------------------
Jeffrey L. Francis
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 By: /s/ Therese Ann Liutkus
---------------------------------------
Therese Ann Liutkus
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)