UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-21638
FFY FINANCIAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1735753
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
724 Boardman-Poland Rd., Youngstown, Ohio 44512
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(Address and Zip Code of Principal Executive Offices)
Registrant's telephone number, including area code: (330) 726-3396
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Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of August 31, 1998, the Registrant had 3,953,935 shares of Common Stock
issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the average of the bid and asked price
of such stock as of August 31, 1998 was $93.0 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not
be deemed an admission by the Registrant that such person is an affiliate of
the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Annual Report to Stockholders for the fiscal
year ended June 30, 1998.
Part III of Form 10-K - Proxy Statement for Annual Meeting of Stockholders
to be held in 1998.
PART I
Item 1. Business
General. FFY Financial Corp. (FFYF or Holding Company), is a Delaware
corporation formed in 1993 at the direction of First Federal Savings Bank of
Youngstown (First Federal or Bank). The Holding Company owns all of the
common stock of First Federal which operates 10 full service banking
facilities and 2 limited banking facilities in Mahoning and Trumbull
Counties, Ohio. At June 30, 1998, the Holding Company had total
consolidated assets of $651.7 million.
The business of the Holding Company currently consists primarily of the
business of First Federal. The holding company structure, however, provides
FFYF with greater flexibility than the Bank has to diversify its business
activities, through existing or newly formed subsidiaries, or through
acquisitions or mergers of both mutual and stock thrift institutions as well
as other companies. In August 1997, FFY Holdings, Inc. was formed, as a
wholly-owned subsidiary of FFYF, for the purpose of investing in entities
that offer expanded financial services to customers. In September 1997 and
April 1998, the Holding Company announced real estate and insurance
affiliations through investments of FFY Holdings, Inc. Currently, there are
no arrangements, understandings or agreements regarding any acquisitions or
mergers, however, the Holding Company is in a position, subject to
regulatory restrictions, to take advantage of any favorable acquisition or
merger opportunity that may arise. First Federal provides a variety of
banking services to its customers other than its primary business activities
of making loans and accepting deposits.
Market Area. First Federal conducts operations through its main office in
Youngstown, Ohio, which is located approximately 75 miles northwest of
Pittsburgh, PA and 75 miles southeast of Cleveland, OH, and through its 11
other banking offices in Ohio. Nine of First Federal's office locations,
including the main office, are in Mahoning County and three office locations
are in Trumbull County. The Youngstown-Warren area (Mahoning and Trumbull
Counties) makes up the 7th largest metropolitan statistical area in the
State of Ohio. First Federal also has customers in Columbiana County
although there are no office locations in such county. According to the
latest census information, approximately 606,000 people live in the tri-
county area, of which approximately 266,000 are residents in Mahoning
County, which is considered First Federal's primary market area. Mahoning
County was once a leading steel producing area, however this industry
experienced significant declines in the total number of persons employed
over the past several years. Major industries in Mahoning County include
light manufacturing, transportation, health care, as well as retail and
wholesale trade and services. Major industries in Trumbull County and
Columbiana County include manufacturing, trade and services. Major
employers in Mahoning County include Western Reserve Care System, St.
Elizabeth Health Center, U.S. Postal Service, Youngstown City Schools and
Youngstown State University. The largest employers in the tri-county area
include General Motors Corporation in Lordstown, Ohio and Delphi Packard
Electric Systems (a division of General Motors Corporation) in Warren, Ohio,
both located in Trumbull County. The Company's business and operating
results could be significantly affected by changes in general economic
conditions, as well as changes in population levels, unemployment rates,
strikes and layoffs.
Forward-Looking Statements
When used in this Form 10-K, or, in future filings by the Holding Company
with the Securities and Exchange Commission, in the Holding Company's press
releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the
words or phrases "will likely result", "are expected to", "will continue",
"is anticipated", "estimate", "project" or similar expressions are intended
to identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in
the Bank's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Bank's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The
Holding 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
Holding Company wishes to advise readers that the factors listed above could
affect the Holding Company's financial performance and could cause the
Holding 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 Holding 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.
Lending Activities
General. The Bank emphasizes the origination of adjustable-rate mortgage
(ARM) loans and 15 year fixed-rate mortgage loans secured by one-to-four
family residences for its own portfolio. The Bank also offers 15 and 30
year fixed-rate loans which, if they qualify, are sold on the secondary
market to Federal National Mortgage Corporation (FNMA). As of June 30,
1998, the Bank did not sell loans to any other secondary market investors.
The Bank also emphasizes the origination of consumer loans with higher
yields and shorter durations than traditional mortgage loans. To a lesser
extent, commercial and multi-family loans with higher yields than
traditional one-to-four family loans are offered by the Bank.
All loans that are $350,000 or less must be approved by either the Vice
President in charge of lending or a committee comprised of officers of the
Bank. Loans greater than $350,000 must be approved by the Executive
Committee of the Board of Directors and loans greater than $650,000 must be
approved by the Board of Directors. All loans, once approved, are reviewed
by the Board of Directors.
The Bank's loans-to-one-borrower limit is generally 15% of unimpaired
capital and surplus. At June 30, 1998, the maximum amount which the Bank
could have lent under this limit to any one borrower and the borrower's
related entities was approximately $8.4 million. At June 30, 1998, the Bank
had no loans or groups of loans to related borrowers with outstanding
balances in excess of this amount. The largest lending relationship at June
30, 1998 totaled $6.3 million which is secured by office buildings located
in Ohio. There are 17 other large lending relationships ranging from $1.1
million to $3.4 million for an aggregate total of $33.3 million. At June
30, 1998, all such loans were performing in accordance with their terms.
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts
and in percentages (before deductions for loans in process, deferred fees
and discounts and allowances for losses) as of the dates indicated.
June 30,
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1998 1997 1996 1995 1994
------------------------------------ ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One-to-four family $354,202 71.65% $349,053 73.59% $334,307 73.64% $308,774 74.45% $293,540 75.58%
Multi-family 15,659 3.17% 16,294 3.44% 15,934 3.51% 15,157 3.65% 12,186 3.14%
Commercial 28,606 5.79% 30,997 6.53% 29,024 6.39% 28,304 6.82% 25,826 6.65%
Construction and development 23,999 4.85% 23,179 4.88% 22,636 4.99% 20,491 4.94% 21,126 5.44%
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Total real estate loans 422,466 85.46% 419,523 88.44% 401,901 88.53% 372,726 89.86% 352,678 90.81%
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Consumer Loans:
Deposit account 1,341 0.27% 1,240 0.26% 1,115 0.25% 1,090 0.26% 1,098 0.28%
Automobile 12,161 2.46% 16,349 3.45% 17,245 3.80% 8,380 2.02% 7,287 1.88%
Home equity 37,912 7.67% 33,269 7.01% 29,783 6.56% 29,711 7.17% 25,055 6.45%
90-day notes 17,677 3.58% 1,323 0.28% 1,441 0.32% 907 0.22% 713 0.18%
Other 2,791 0.56% 2,646 0.56% 2,479 0.54% 1,949 0.47% 1,535 0.40%
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Total consumer loans 71,882 14.54% 54,827 11.56% 52,063 11.47% 42,037 10.14% 35,688 9.19%
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Total loans 494,348 100.00% 474,350 100.00% 453,964 100.00% 414,763 100.00% 388,366 100.00%
====== ====== ====== ====== ======
Less:
Loans in process (6,557) (7,861) (8,830) (6,346) (8,136)
Deferred fees and discount (2,588) (2,815) (2,905) (3,594) (3,987)
Allowance for losses (2,740) (2,962) (3,439) (3,159) (2,801)
-------- -------- -------- -------- --------
Total loans receivable, net $482,463 $460,712 $438,790 $401,664 $373,442
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The following table shows the composition of the Bank's loan portfolio by
fixed and adjustable rates at the dates indicated.
June 30,
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1998 1997 1996 1995 1994
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One-to-four family(1) $217,075 43.91% $260,128 54.84% $268,816 59.21% $246,036 59.32% $232,521 59.87%
Multi-family 3,965 0.80% 3,969 0.84% 3,624 0.79% 5,256 1.27% 4,700 1.21%
Commercial 24,533 4.96% 24,498 5.16% 23,784 5.24% 23,818 5.74% 21,243 5.47%
Construction and development 21,087 4.27% 23,179 4.88% 22,636 4.99% 20,461 4.93% 21,126 5.44%
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Total fixed-rate real estate
loans 266,660 53.94% 311,774 65.72% 318,860 70.23% 295,571 71.26% 279,590 71.99%
Consumer - fixed-rate 67,243 13.60% 52,013 10.97% 50,081 11.03% 40,870 9.85% 35,415 9.12%
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Total fixed-rate loans 333,903 67.54% 363,787 76.69% 368,941 81.26% 336,441 81.11% 315,005 81.11%
Adjustable-Rate Loans:
Real estate:
One-to-four family(1) 137,127 27.74% 88,925 18.75% 65,491 14.43% 62,738 15.13% 61,019 15.71%
Multi-family 11,694 2.37% 12,325 2.60% 12,310 2.71% 9,901 2.39% 7,486 1.93%
Commercial 4,073 0.82% 6,499 1.37% 5,240 1.16% 4,486 1.08% 4,583 1.18%
Construction and development 2,912 0.59% - - - - 30 0.01% - -
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Total adjustable-rate real
estate loans 155,806 31.52% 107,749 22.72% 83,041 18.30% 77,155 18.61% 73,088 18.82%
Consumer - adjustable-rate 4,639 0.94% 2,814 0.59% 1,982 0.44% 1,167 0.28% 273 0.07%
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Total adjustable-rate loans 160,445 32.46% 110,563 23.31% 85,023 18.74% 78,322 18.89% 73,361 18.89%
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Total loans 494,348 100.00% 474,350 100.00% 453,964 100.00% 414,763 100.00% 388,366 100.00%
====== ====== ====== ====== ======
Less:
Loans in process (6,557) (7,861) (8,830) (6,346) (8,136)
Deferred fees and discounts (2,588) (2,815) (2,905) (3,594) (3,987)
Allowance for losses (2,740) (2,962) (3,439) (3,159) (2,801)
-------- -------- -------- -------- --------
Total loans receivable, net $482,463 $460,712 $438,790 $401,664 $373,442
======== ======== ======== ======== ========
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<F1> One-to-four family 7/1-year ARMs were classified as fixed-rate loans for
1997 and 1996 and were reclassified to adjustable-rate loans for this
presentation.
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1998. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract matures. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Real Estate
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Construction and
One-to-four family Multi-family Commercial Development Consumer Total
------------------ ----------------- ----------------- ----------------- ----------------- ------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During
Periods Ending
June 30,
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1999(1) $ 427 6.66% $ - - $ 110 8.30% $ 6,043 9.43% $20,123 9.48% $ 26,703 9.42%
2000 to 2003 12,513 8.64% 1,651 9.00% 3,554 8.50% 12,372 9.08% 26,959 9.56% 57,049 9.17%
2004 and following 341,262 7.74% 14,008 8.92% 24,942 9.14% 5,584 7.92% 24,800 9.57% 410,596 7.98%
-------- ------- ------- ------- ------- --------
$354,202 $15,659 $28,606 $23,999 $71,882 $494,348
======== ======= ======= ======= ======= ========
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<F1> Includes overdraft loans.
The total amount of loans due after June 30, 1999 which have predetermined
interest rates is $339.8 million, while the total amount of loans due after
such dates which have floating or adjustable interest rates is $127.8
million.
One-to-Four Family Residential Real Estate Lending
The cornerstone of the Bank's lending program has been the origination of
permanent loans, to be held in its portfolio, secured by mortgages on owner-
occupied, one-to-four family residences. The Bank has generally limited its
real estate loan originations to properties within its market area. As of
June 30, 1998, all one-to-four family residential loans were located in the
Bank's market area. The Bank originates both fixed and ARM loans with terms
up to 30 years with its focus primarily on ARM originations as part of its
asset/liability management. Fixed-rate originations are generally affected
by market rates, customer preference and competition. In the current low
interest rate environment, borrowers typically prefer fixed-rate loans over
ARM loans, however, the Bank has been successful in originating 7/1-year
ARMs which are fixed for seven years and convert to a one-year ARM in the
eighth year. At June 30, 1998, $52.0 million, or 10.5% of the Bank's gross
loan portfolio consisted of 7/1-year ARMs compared to $15.1 million, or 3.2%
at June 30, 1997. A significant portion of the Bank's other ARM products
are subject to interest adjustments at three-year intervals. The Bank's ARM
products generally carry interest rates which are reset to a stated margin
over an independent index. Increases and decreases in the interest rate of
the Bank's ARMs are generally limited to 2% at any adjustment date and 5%
over the life of the loan. The Bank's ARMs are not convertible into fixed-
rate loans, are not assumable, do not contain prepayment penalties and do
not produce negative amortization.
The Bank evaluates both the borrower's ability to make principal and
interest payments and the value of the property that will secure the loan.
In the past, First Federal generally did not verify a borrower's employment
history or the source of the down payment enabling the Bank to close a loan
significantly faster than its competitors. However, in order to comply with
standard secondary market underwriting requirements, First Federal
established procedures to verify employment history and down payment sources
since the Bank sells certain qualifying loans to FNMA. Underwriting
standards required by FNMA and other secondary market investors are also
followed for new loan originations that the Bank retains in its portfolio.
The compliance with secondary market underwriting standards did not
significantly affect the timing of closing loans.
The Bank originates residential mortgage loans with loan-to-value ratios up
to 95%. On mortgage loans exceeding an 85% loan-to-value ratio at the time
of origination, however, First Federal generally requires private mortgage
insurance in an amount intended to reduce the Bank's exposure to 72% of the
appraised value of the underlying collateral. Property securing real estate
loans made by First Federal is appraised by staff appraisers of the Bank.
The Bank requires evidence of marketable title and lien position on all
loans secured by real property and requires fire and extended coverage
casualty insurance in amounts at least equal to the principal amount of the
loan or the value of improvements on the property, depending on the type of
loan. The Bank may also require flood insurance to protect the property
securing its interest.
Residential mortgage loan originations derive from a number of sources,
including real estate broker referrals, existing borrowers and depositors,
builders and walk-in customers. Loan applications are accepted at all of
the Bank's offices.
Multi-Family and Commercial Real Estate Lending
First Federal originates permanent loans secured by multi-family and
commercial real estate in order to enhance the yield on its assets. The
permanent multi-family and commercial real estate loan portfolio includes
loans secured by strip shopping centers, apartments, small office buildings,
warehouses, churches and other business properties, approximately 88% of
which are located within the Bank's market area.
Permanent multi-family and commercial real estate loans have a maximum term
of 30 years, with most having terms ranging from 10 to 15 years. Rates on
permanent loans are predominantly fixed, based on competitive factors. To a
lesser extent, the Bank originates adjustable rate loans which generally
carry interest rates which are reset to a stated margin over an independent
index. Multi-family loans and commercial real estate loans are generally
written in amounts of up to 75% of the appraised value of the property, and
borrowers are generally personally liable for all or part of the
indebtedness. However, none of the loans comprising the Bank's second
largest lending relationship of $3.4 million are subject to any personal
guarantees, but are performing according to their terms.
Appraisals on properties securing multi-family and commercial real estate
loans originated by the Bank are performed by either an independent
appraiser designated by the Bank or by the Bank's staff appraisers at the
time the loan is made. All appraisals on multi-family and commercial real
estate loans are reviewed by the Bank's management. In addition, the Bank's
current underwriting procedures generally require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property.
At June 30, 1998, the Bank had one multi-family or commercial real estate
loan with a net book value in excess of $2.0 million, and six other multi-
family or commercial real estate loans, each with a net book value in excess
of $1.0 million but less than $2.0 million. All of these loans were current
at that date. However, one of these commercial real estate loans, totaling
approximately $1.2 million at June 30, 1998, is secured by a strip shopping
center where the anchor tenant has no established sales history. This loan
has been classified substandard as of June 30, 1998. See "- Asset Quality -
Troubled Debt Restructurings," "- Other Loans of Concern," "- Classified
Assets" and "- Allowance for Loan Losses."
Multi-family and commercial real estate loans generally present a higher
level of risk than loans secured by one-to-four family residences. This
greater risk is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on income producing properties and the increased
complexity of evaluating and monitoring these types of loans. Furthermore,
the repayment of loans secured by multi-family and commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed, or a bankruptcy court modifies a lease
term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired.
Construction and Development Lending
The Bank makes loans to individuals for the construction of their
residences, as well as to builders and developers for the construction of
one-to-four family residences and commercial real estate and the development
of one-to-four family lots in Ohio. At June 30, 1998, all of these loans
were secured by property located within the Bank's market area.
Construction loans to individuals for their residences are structured to be
converted to permanent loans at the end of the construction phase, which
typically runs six months. These construction loans have rates and terms
which match any one-to-four family loans then offered by the Bank, except
that during the construction phase, the borrower pays interest only and the
maximum loan-to-value ratio is 90%. On construction loans exceeding an 85%
loan-to-value ratio, First Federal generally requires private mortgage
insurance, thus reducing the Bank's exposure. Residential construction
loans are generally underwritten pursuant to the same guidelines used for
originating permanent residential loans. At June 30, 1998, the Bank had
$10.1 million of construction loans to borrowers intending to live in the
properties upon completion of construction.
Construction loans to builders of one-to-four family residences require the
payment of interest only for up to 12 months and have terms of up to 12
months. These loans may provide for the payment of interest and loan fees
from loan proceeds and carry fixed rates of interest. Loan fees charged in
connection with the origination of such loans range from 1% of the loan
amount to a maximum of $2,000. At June 30, 1998, the Bank had $5.3 million
of construction loans to builders of one-to-four family residences.
The Bank also makes loans to builders for the purpose of developing one-to-
four family homesites. These loans typically have terms of from one to
three years and carry fixed interest rates. The maximum loan-to-value ratio
is 75% for such loans. Loan fees charged in connection with the origination
of such loans generally range from 1% to 2% of the loan amount. These loans
may provide for the payment of interest and loan fees from loan proceeds.
The principal in these loans is typically paid down as homesites are sold.
At June 30, 1998, the Bank had $7.4 million of development loans to
builders.
Construction loans on commercial real estate projects may be secured by
strip shopping centers, apartments, small office buildings, churches or
other property and are structured to be converted to permanent loans at the
end of the construction phase, which generally runs up to 12 months. These
construction loans have rates and terms which match any permanent multi-
family or commercial real estate loan then offered by the Bank, except that
during the construction phase, the borrower pays interest only. These loans
generally provide for the payment of interest and loan fees from loan
proceeds. At June 30, 1998, the Bank had $1.2 million of commercial real
estate construction loans.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Bank, as well as referrals from existing customers and walk-in
customers. The application process includes a submission to the Bank of
accurate plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus
building).
Because of the uncertainties inherent in estimating development and
construction costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. In addition, management requires pro forma
cash flow analysis and debt service coverage ratios or verification of
construction progress prior to authorizing a construction draw and require
mechanics' lien waivers and other documents to protect and verify its lien
position. Construction and development loans to borrowers other than owner-
occupants also involve many of the same risks discussed above regarding
multi-family and commercial real estate loans and tend to be more sensitive
to general economic conditions than many other types of loans. Also, the
funding of loan fees and interest during the construction phase makes the
monitoring of the progress of the project particularly important, as
customary early warning signals of project difficulties may not be present.
At June 30, 1998, there were no construction and development loans in an
amount greater than $1.0 million.
Consumer Lending
The Bank originates various types of consumer loans including, but not
limited to, home equity and automobile loans. Since 1990, First Federal has
placed increasing emphasis on consumer loans, particularly home equity
loans, because of their attractive yields and shorter terms to maturity.
The Bank's home equity loans are written so that the total commitment
amount, when combined with the balance of the first mortgage lien, may not
exceed 100% of the appraised value of the property where the Bank holds the
first lien and 80% if the first mortgage is held by a third party. At June
30, 1998, the Bank held a first lien on approximately 94% of the properties
securing home equity loans from the Bank. Closed-end home equity loans are
written with terms of up to ten years and carry fixed rates of interest.
Open-end home equity lines of credit are written for a draw period of 10
years at a variable interest rate of 1% above the prime rate adjusted
monthly. After the draw period, the lines of credit convert into fixed
rate, closed-end loans with terms of up to 10 years, or the lines of credit
can be renewed. The Bank's home equity loan portfolio grew from $29.8
million, or 57% of gross consumer loans at June 30, 1996 to $37.9 million,
or 53% of gross consumer loans at June 30, 1998. Without the effect of the
increase in short-term consumer loans mentioned below, home equity loans
would account for approximately 68% of gross consumer loans at June 30,
1998.
During fiscal year 1996, the Bank began originating automobile loans through
dealerships (indirect auto lending) in an effort to gain a portion of this
market. However, this program was discontinued after approximately 14
months of operation due to the performance of the portfolio. At September
30, 1996, this portfolio had 1,001 loans totaling $12.3 million and has
subsequently dropped to 857 loans totaling $8.9 million at June 30, 1997 and
644 loans totaling $5.5 million at June 30, 1998. The decline over the past
two years was due to both write-offs and principal receipts. Management has
identified potential problem loans that remain in this portfolio and
believes there are adequate reserves at June 30, 1998. Indirect auto loans
tend to be of greater risk than direct auto loans due to the fact that
institutions such as the Bank work with dealers rather than directly with
the customers.
During June 1998, the Bank lent $15.9 million in short-term loans (90-day
notes) to customers to fund their stock subscriptions for a local financial
institution's initial public offering. At August 31, 1998, $2.6 million of
these loans remained outstanding. There is no prepayment penalty on 90-day
notes.
The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and ability
to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the
security, if any, in relation to the proposed loan amount. While consumer
loans other than home equity loans generally involve a higher level of
credit risk than one-to-four family residential loans, consumer loans are
typically made at higher interest rates and for shorter terms. The shorter
term of consumer loans reduces the Bank's exposure to interest rate risk.
Sale of Mortgage Loans
During the current year, the Bank began selling one-to-four family fixed-
rate mortgage loans to FNMA. The Bank originated and sold $5.0 million of
fixed-rate 15- and 30-year loans during fiscal year 1998 and recorded a gain
of $134,000 for the sale of such loans. The Bank retains servicing on such
loans sold to FNMA, typically receiving a servicing fee of 25 basis points.
Loan Origination and Repayment Activities
The following table sets forth the Bank's originations, sales and repayments
of loans for the periods indicated.
Year ended June 30,
-------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Originations by type:
- ---------------------
Adjustable rate:
Real estate - one-to-four family(1) $ 45,473 31,668 14,113
- multi-family 586 943 1,922
- commercial 3,413 995 654
- construction or development 2,250 197 451
Non-real estate - consumer 4,844 2,395 2,320
-------------------------------
Total adjustable rate 56,566 36,198 19,460
-------------------------------
Fixed rate:
Real estate - one-to-four family(1) 8,834 19,045 45,735
- multi-family 658 314 677
- commercial 1,069 2,248 2,136
- construction or development 27,997 29,045 27,413
Non-real estate - consumer 48,728 32,013 34,790
-------------------------------
Total fixed rate 87,286 82,665 110,751
-------------------------------
Total loans originated 143,852 118,863 130,211
Principal repayments (105,621) (97,840) (91,206)
Loan sales (4,988) - -
Increase (decrease) in other items, net (795) (638) 196
-------------------------------
Net increase $ 32,448 20,385 39,201
===============================
- --------------------
<F1> One-to-four family 7/1-year ARM originations were reclassified from
fixed to adjustable rate originations for 1997 and 1996.
Asset Quality
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the delinquency by contacting the borrower. In the case of
residential loans, a late notice is generated between 15 and 30 days past
the due date and collection action is commenced. Written and verbal
contacts are attempted from this point until the account is brought to a
current status. If the delinquency continues, a default letter is generally
sent between 60 and 90 days and if the status does not improve, the Bank
will begin foreclosure action between 90 and 120 days past due.
Delinquent consumer loans, including home equity loans, are handled in a
similar manner except that late notices are generated between 10 and 15 days
past due and collection action is commenced at that point. If the
delinquency continues and no arrangements are made with the borrower, the
Bank will take appropriate action to protect its interest generally by 60
days past due. This may include repossession, foreclosure or law suit, if
necessary. If repossession of a vehicle occurs, the borrower has the
opportunity to redeem the vehicle prior to sale at public auction by
contacting the Bank any paying charges and delinquencies associated with the
repossession. The Bank's repossession guidelines comply with the
requirements under the Ohio Revised Code.
The Bank has not experienced significant delinquencies with multi-family,
commercial real estate or commercial real estate construction loans.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 1998, in dollar amounts and as a percentage of
each category of the Bank's loan portfolio. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue.
Loans Delinquent For:
------------------------------------------------------------ Total Loans Delinquent
60-89 Days 90 Days and Over 60 Days and Over
---------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One-to-four family 28 $1,473 0.42% 54 $2,280 0.64% 82 $3,753 1.06%
Construction or
development 1 137 0.57% - - - 1 137 0.57%
Consumer 30 188 0.26% 68 582 0.81% 98 770 1.07%
-------------- --------------- ---------------
Total 59 $1,798 0.36% 122 $2,862 0.58% 181 $4,660 0.94%
============== =============== ===============
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. The
Bank's current approach requires that loans be reviewed periodically and any
loan where collectibility of principal is doubtful is placed on non-accrual
status. Loans are also placed on non-accrual status generally when a loan
is more than 90 days delinquent. Payments received on non-accruing loans
are recorded as interest income, or are applied to the principal balance,
depending on an assessment of the collectibility of the principal of the
loan. Loans remain on non-accrual status until generally less than 4
payments delinquent. Troubled debt restructurings are instances where, due
to the debtor's financial difficulties, modifications are made in the
original terms of the loans (e.g., principal or interest may be forgiven,
the term of the loan may be extended or the interest rate may be reduced
below market rates). Loans remain as troubled debt restructurings until
they are current for 12 consecutive months and the modifications originally
given are not inconsistent with terms currently provided. Foreclosed assets
include assets acquired in settlement of loans. The amounts shown do not
reflect reserves set up against such assets. See "- Allowance for Loan
Losses."
June 30,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One-to-four family $2,168 2,359 3,617 3,405 3,463
Multi-family - - - - 4
Commercial real estate - 110 - 67 -
Construction or development - 4 71 - -
Consumer 566 782 409 420 404
----------------------------------------------
Total 2,734 3,255 4,097 3,892 3,871
----------------------------------------------
Troubled debt restructurings:
One-to-four family 575 685 506 405 879
Consumer 15 53 70 55 144
----------------------------------------------
Total 590 738 576 460 1,023
----------------------------------------------
Total non-performing loans 3,324 3,993 4,673 4,352 4,894
----------------------------------------------
Foreclosed assets:
One-to-four family - - - - 36
----------------------------------------------
Total non-performing assets $3,324 3,993 4,673 4,352 4,930
==============================================
Total non-performing assets as a percentage
of total assets 0.51% 0.67% 0.81% 0.75% 0.84%
==============================================
Total non-performing loans as a percentage
of total loans receivable, net 0.69% 0.87% 1.06% 1.08% 1.32%
==============================================
Allowance for loan losses as a percentage
of non-performing assets 82.43% 74.18% 73.59% 72.59% 56.82%
==============================================
For the year ended June 30, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $262,000. The amount that was included in
interest income on such loans was $194,000 for the year ended June 30, 1998.
For the year ended June 30, 1998, gross interest income which would have
been recorded had the troubled debt restructurings been current in
accordance with their original terms amounted to $42,000. The amount that
was included in interest income on such loans was $50,000 for the year ended
June 30, 1998.
Troubled Debt Restructurings and Other Loans of Concern. As of June 30,
1998, the Bank had $590,000 in net book value of troubled debt
restructurings, approximately 97% of which were mortgage loans secured by
one-to-four family residences. The largest outstanding balance of mortgage
loans categorized as troubled debt restructuring was approximately $83,000
at June 30, 1998.
Willard, Ohio - Strip Shopping Center. In 1987, the Bank originated a $1.6
million construction/permanent loan on a strip shopping center in Willard,
Ohio. The loan had a 9.75% interest rate, a term of 15 years and was to be
amortized over 20 years. In July 1992, the shopping center's sole tenant
vacated the premises after filing for bankruptcy and a new tenant, without
any established operating history, moved in. The new tenant negotiated
lease terms at rates lower than the original tenant, thereby reducing the
revenue to the borrower. As a result, the loan was modified to reduce the
interest rate to 7% until 1997; 7.63% until 2002; and 8% until maturity in
2007. The loan was current under the modified loan terms as of June 30,
1998. The Bank's net book value for the loan at June 30, 1998 was
approximately $1.2 million. This loan was removed from troubled debt
restructurings at June 30, 1994 due to the payment history of the borrower
and the reduction in general market interest rates to the point where the
restructured terms no longer represented concessions. The Bank's management
reviews the tenant's operating statement annually and has classified this
loan as substandard at June 30, 1998 based on their review.
Classified Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An
asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have
all of the weaknesses inherent in those classified "substandard," with the
added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions,
and values, "highly questionable and improbable." Assets classified as
"loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss
reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of that portion of
the asset so classified or to charge off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS and the FDIC, either of
which may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly
reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations.
Classified assets at June 30, 1998 consisted of 146 loans totaling $5.0
million, or 0.8% of total assets compared to 231 loans totaling $6.8
million, or 1.1% of total assets at June 30, 1997. The decline in
classified assets over the past year was primarily in indirect auto loans
(see "Consumer Lending" above). The largest classified asset was $1.2
million at June 30, 1998 and is discussed above under "Troubled Debt
Restructurings and Other Loans of Concern".
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers among
other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Although management believes it uses the best information available to make
such determinations, future adjustments to reserves may be necessary, and
net income could be significantly affected, if circumstances differ
substantially from the assumptions used in making the initial
determinations. At June 30, 1998, the Bank had an allowance for loan losses
of $2.7 million, which was equal to 54.4% of classified assets and 82.4% of
non-performing assets. See Notes 1(f) and 3 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders, included as
Exhibit 13 herein.
The following table sets forth an analysis of the Bank's allowance for loan
losses at the dates indicated.
Year Ended June 30,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period $2,962 3,439 3,159 2,801 2,437
Charge-offs:
One-to-four family (97) (40) (18) (43) (40)
Multi-family - - (1) (1) -
Consumer (743) (1,159) (58) (16) (13)
----------------------------------------------
(840) (1,199) (77) (60) (53)
----------------------------------------------
Recoveries:
One-to-four family 3 1 18 12 6
Construction or development - - 2 - -
Commercial real estate - - 2 - -
Consumer 50 33 10 3 2
----------------------------------------------
53 34 32 15 8
----------------------------------------------
Net charge-offs (787) (1,165) (45) (45) (45)
Additions charged to operations 565 688 325 403 409
----------------------------------------------
Balance at end of period $2,740 2,962 3,439 3,159 2,801
==============================================
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.17% 0.26% 0.01% 0.01% 0.01%
==============================================
Ratio of net charge-offs during
the period to average
non-performing assets 20.74% 24.22% 0.94% 1.04% 0.65%
==============================================
When the Bank repossesses mortgaged property it is thereafter classified as
real estate owned. Any gains or losses (realized or reserved for)
thereafter are treated as real estate owned activity, not mortgage loan
activity. At June 30, 1998, the Bank had no real estate owned.
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
June 30,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
One-to-four family $ 923 71.65% $1,283 73.59% $1,547 73.64% $1,093 74.45% $ 781 75.58%
Multi-family 19 3.17% 28 3.44% 88 3.51% 53 3.65% 1 3.14%
Commercial real estate 351 5.79% 444 6.53% 773 6.39% 1,704 6.82% 1,459 6.65%
Construction or development 15 4.85% 45 4.88% 125 4.99% 72 4.94% - 5.44%
Consumer 1,201 14.54% 787 11.56% 518 11.47% 237 10.14% 166 9.19%
Unallocated 231 - 375 - 388 - - - 394 -
-----------------------------------------------------------------------------------------------
Total $2,740 100.00% $2,962 100.00% $3,439 100.00% $3,159 100.00% $2,801 100.00%
===============================================================================================
Investment Activities
First Federal's investment policy is designed to provide a required level of
liquidity and minimize potential losses due to interest rate fluctuations
without incurring undue credit risk. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. The Bank has maintained
liquid assets at levels above the minimum requirements imposed by the OTS
regulations and above levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. Cash flow
projections are regularly reviewed and updated to assure that adequate
liquidity is maintained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management"
and "- Liquidity and Cash Flows" in the Annual Report to Stockholders
included as Exhibit 13 herein and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly.
Generally, the investment policy of the Holding Company and Bank is to
invest funds among various categories of investments and maturities based on
asset/liability management policies, concern for the highest investment
quality, liquidity needs and performance objectives. It is the Holding
Company's and Bank's general policy to purchase securities which are U.S.
Government securities, federal agency obligations, including mortgage-backed
securities, and state, county and municipal bonds.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators through intermediaries
(generally U.S. Government agencies and government sponsored enterprises)
that pool and repackage the participation interest in the form of securities
to investors such as the Bank. The underlying pool of mortgages can be
composed of either fixed-rate or ARM loans. As a result, the interest rate
risk characteristics of the underlying pool of mortgages, as well as
prepayment risk, are passed on to the certificate holder. Mortgage-backed
securities generally yield less than the loans that underlie such securities
due to the cost of payment guarantees or credit enhancements that reduce
credit risk to holders. Mortgage-backed securities are also more liquid
than individual mortgage loans and may be used to collateralize obligations
of the Bank. While mortgage-backed securities carry a reduced credit risk
as compared to whole loans, such securities remain subject to the risk that
a fluctuating interest rate environment, along with other factors such as
the geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and thereby affect both the
prepayment speed, and value, of such securities. All of the Bank's
mortgage-backed securities are available for sale and consist of securities
issued or guaranteed by the FNMA, Federal Home Loan Mortgage Corporation
(FHLMC) and Government National Mortgage Association (GNMA). At June 30,
1998, $81.4 million, or 58% of the securities portfolio consisted of
mortgage-backed securities.
The Holding Company and Bank have invested a percentage of their securities
portfolio in Federal agency obligations in an attempt to obtain the highest
yield possible while maintaining the flexibility and low credit risk
connected with such investments. Since 1990, the Federal Home Loan Banks
(FHLBs), FNMA and FHLMC have offered callable bonds, issued at a yield
premium over U.S. Treasury obligations of a comparable final maturity. The
call risk is considered acceptable to the Bank because it provides a higher
yield. The call option would typically be exercised during a declining
interest rate environment, during which time the Bank's cost of funds would
also be declining. At June 30, 1998, $35.0 million, or 24% of the
securities portfolio consisted of Federal agency obligations.
The following table sets forth the composition of the consolidated debt,
equity and other securities, and FHLB stock portfolios at June 30, 1998,
1997 and 1996.
June 30,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------------------- ------------------- -------------------
(Dollars in Thousands)
Debt securities:
U.S. government securities $ - - $ 2,005 1.73% $ 37,011 32.20%
Federal agency obligations(1) 35,049 24.33% 24,975 21.54% 53,003 46.12%
Mortgage-backed securities 81,580 56.63% 75,718 65.29% 16,398 14.27%
State, county and municipal bonds 20,778 14.42% 7,416 6.40% 4,263 3.71%
Equity securities 637 0.44% 753 0.65% 478 0.42%
Other securities 1,517 1.05% 1,000 0.86% - -
FHLB stock 4,512 3.13% 4,095 3.53% 3,774 3.28%
----------------------------------------------------------------
Total securities and FHLB stock $144,073 100.00% $115,962 100.00% $114,927 100.00%
================================================================
Average remaining life of debt securities excluding
equity and other securities and FHLB stock 4.66 years 4.72 years 4.67 years
Other interest-earning assets:
Interest-bearing deposits with banks $ 5,713 100.00% $ 6,216 97.49% $ 4,888 100.00%
Short-term investments - - 160 2.51% - -
----------------------------------------------------------------
Total $ 5,713 100.00% $ 6,376 100.00% $ 4,888 100.00%
================================================================
Average remaining life or term to repricing of debt
securities and other interest-earning assets excluding
equity and other securities and FHLB stock 4.47 years 4.47 years 4.47 years
- --------------------
<F1> Excluding mortgage-backed securities which include FNMA, FHLMC and
GNMA pass-through certificates.
The composition and contractual maturities of the consolidated debt and
other securities portfolios, excluding equity securities and FHLB of
Cincinnati stock, are indicated in the following table.
June 30, 1998
-----------------------------------------------------------------
Over Over
One Year 1 thru 5 5 thru 10 Over Total Debt and Other
or Less Years Years 10 Years Securities
-------- -------- --------- -------- --------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
-------- -------- --------- -------- ----- ------
(Dollars in Thousands)
Debt securities:
Federal agency obligations $ 8,048 27,001 - - 35,049 35,283
Mortgage-backed securities 3,572 2,700 9,167 66,141 81,580 81,444
State, county and municipal
securities - 1,927 15,182 3,669 20,778 21,049
Other - - - 1,517 1,517 1,758
----------------------------------------------------------------
Total debt and other securities $11,620 31,628 24,349 71,327 138,924 139,534
================================================================
Weighted average yield(1) 6.18% 6.31% 6.84% 6.08% 6.22%
====================================================
- --------------------
<F1> Weighted average yield is presented for debt securities only on a
fully taxable equivalent basis using the Company's federal statutory
tax rate of 34%.
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization and
prepayment of loans, maturities, sales and principal receipts of securities,
borrowings, repurchase agreements and operations. The Bank also has access
to advances from the Federal Home Loan Bank (FHLB) of Cincinnati. See Note
7 of the Notes to Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein for a detail of advances from the
FHLB of Cincinnati.
Deposits. First Federal offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook
and statement savings accounts, NOW accounts (including non-interest bearing
checking accounts), money market and certificate accounts. The Bank relies
primarily on advertising, competitive pricing policies, promotions and
customer service to attract and retain these deposits. Management believes
the Bank is competitive in the types of accounts and interest rates it has
offered on its deposit products. In November 1997, First Federal introduced
a new money market product that offers attractive rates and liquidity to
customers. Refer to "Management's Discussion and Analysis of Changes in
Financial Condition and Results of Operations - Deposits" in the Annual
Report to Stockholders included as Exhibit 13 herein. Management regularly
evaluates the internal cost of funds, surveys rates offered by the Bank's
competitors, review the Company's cash flow requirements for lending and
liquidity and executes rate changes when necessary as part if its
asset/liability management, profitability and growth objectives. First
Federal generally solicits deposits from its market area.
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank for the dates
indicated and the rates offered as of June 30, 1998. See Note 5 of the
Notes to Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein for weighted average nominal
rates.
June 30,
----------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transaction and Savings Deposits:
- ---------------------------------
Passbook and statement savings
accounts 2.50% to 3.00% $ 93,276 21.01% $107,575 23.89% $114,247 25.03%
NOW and non-interest bearing
accounts 0.00% - 2.50% 34,382 7.74% 31,236 6.94% 28,168 6.17%
Money market
accounts 0.00% - 4.41% 28,059 6.32% 22,822 5.07% 27,031 5.92%
---------------------------------------------------------------
Total non-certificates 155,717 35.07% 161,633 35.90% 169,446 37.12%
---------------------------------------------------------------
Total Certificates:
- -------------------
4.00% - 4.99% 29,484 6.64% 8,809 1.96% 27,815 6.09%
5.00% - 5.99% 141,125 31.78% 146,339 32.50% 134,702 29.50%
6.00% - 6.99% 109,895 24.75% 124,649 27.69% 68,145 14.93%
7.00% - 7.99% 7,796 1.76% 8,794 1.95% 56,433 12.36%
--------------------------------------------------------------
Total certificates 288,300 64.93% 288,591 64.10% 287,095 62.88%
--------------------------------------------------------------
Total deposits $444,017 100.00% $450,224 100.00% 456,541 100.00%
==============================================================
The following table sets forth the savings flows at the Bank during the
periods indicated. The net decrease refers to the amount of withdrawals
during the period less deposits and interest credited during the period.
Year Ended June 30,
--------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Opening balance $450,224 456,541 461,979
Net deposits/withdrawals
and transfers (27,340) (28,006) (27,511)
Interest credited 21,133 21,689 22,073
--------------------------------
Ending balance $444,017 450,224 456,541
================================
Net decrease (6,207) (6,317) (5,438)
================================
Percent decrease -1.38% -1.38% -1.18%
=================================
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1998.
0.00%- 5.00%- 6.00%- 7.00%- Percent
4.99% 5.99% 6.99% 7.99% Total of Total
----------------------------------------------------------------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
September 30, 1998 $15,339 33,400 3,741 99 52,579 18.2%
December 31, 1998 8,374 27,375 1,160 - 36,909 12.8%
March 31, 1999 458 18,944 24,914 154 44,470 15.4%
June 30, 1999 1,911 13,844 13,978 - 29,733 10.3%
September 30, 1999 977 16,187 7,226 1,884 26,274 9.1%
December 31, 1999 741 5,610 7,458 50 13,859 4.8%
March 31, 2000 1,105 4,939 8,272 2,310 16,626 5.8%
June 30, 2000 539 3,246 7,170 115 11,070 3.8%
September 30, 2000 40 1,817 5,248 - 7,105 2.5%
December 31, 2000 - 1,929 2,370 - 4,299 1.5%
March 31, 2001 - 3,167 1,068 - 4,235 1.5%
June 30, 2001 - 3,643 133 - 3,776 1.3%
September 30, 2001 - 1,375 300 50 1,725 0.6%
Thereafter - 5,649 26,857 3,134 35,640 12.4%
---------------------------------------------------------------
Total $29,484 141,125 109,895 7,796 288,300 100.0%
===============================================================
Percent of total 10.2% 49.0% 38.1% 2.7% 100.0%
=====================================================
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of June 30, 1998.
Maturity
------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-----------------------------------------------------
(Dollars in Thousands)
Certificates of deposit less than $100,000 $45,981 25,432 63,503 104,834 239,750
Certificates of deposit greater than
or equal to $100,000 6,598 11,477 10,700 19,775 48,550
-----------------------------------------------------
Total certificates of deposit $52,579 36,909 74,203 124,609 288,300
=====================================================
Subsidiary and Other Activities
First Federal and FFY Holdings, Inc. are wholly-owned subsidiaries of the
Holding Company. First Federal has one subsidiary--Ardent Service
Corporation (Ardent), which was formed on July 16, 1997 for the purpose of
being a 50% owner of Hedgerows Development, Ltd., a limited liability
company formed for the purpose of constructing, marketing and selling
residential condominium units. Ardent is a wholly-owned subsidiary of First
Federal.
Competition
First Federal's business of originating loans and attracting deposits is
highly competitive. First Federal competes actively with other savings and
loan associations, national and state banks, commercial banks, credit
unions, mortgage bankers and other financial service entities. The primary
factors in competing for loans are interest rates, loan fees, timing and
quality of service. The primary factors in competing for deposits are
interest rates, customer service and convenience of office locations.
Employees
At August 31, 1998, the Bank had a total of 194 employees, including 53
part-time employees. The Bank's employees are not represented by any
collective bargaining group. Management considers its employee relations to
be good.
Regulation
General. First Federal is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of
the United States Government. Accordingly, First Federal is subject to
broad federal regulation and oversight extending to all of its operations.
First Federal is a member of the Federal Home Loan Bank of Cincinnati and is
subject to certain limited regulation by the Board of Governors of the
Federal Reserve System (Federal Reserve Board). First Federal is a member
of the Savings Association Insurance Fund (SAIF) and the deposits of First
Federal are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over First Federal. Certain of these
regulatory requirements and restrictions are discussed below or elsewhere in
this document.
The Holding Company, as a savings and loan holding company within the
meaning of the Home Owners Loan Act (HOLA), is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Holding Company.
Federal Regulation of Savings Associations. The OTS, as the Bank's primary
federal regulator and chartering authority, and the FDIC, as the insurer of
its deposits, have extensive authority over the operations of savings
associations. As part of this authority, First Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the
OTS and the FDIC. The last regular OTS examinations of First Federal were
as of March 31, 1997 for safety and soundness and April 30, 1997 for
compliance. The last FDIC examination of First Federal was as of June 30,
1990. Under agency scheduling guidelines, it is likely that another
examination by the OTS or the FDIC will be initiated in the near future.
All savings associations are subject to a semi-annual assessment, based upon
the savings association's total assets, to fund the operations of the OTS.
First Federal's OTS assessment for the fiscal year ended June 30, 1998 was
$130,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and the
Holding Company. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations
and unsafe or unsound practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely reports filed
with the OTS. Except under certain circumstances, public disclosure of
final enforcement actions by the OTS and the FDIC is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and regulations, and it is prohibited
from engaging in any activities not permitted by such laws and regulations.
For instance, no savings institution may invest in non-investment grade
corporate debt securities not rated in one of the four highest rating
categories by a nationally recognized rating organization. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of the institution's
regulatory capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. First
Federal is in compliance with the noted restrictions.
First Federal's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and
surplus). At June 30, 1998, First Federal's lending limit under this
restriction was $8.4 million. First Federal is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to
comply with an approved plan will subject the institution to further
enforcement action.
Insurance of Accounts and Regulation by the FDIC. First Federal is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
$100,000 per insured member (as defined by law and regulation) by the FDIC
and such insurance is backed by the full faith and credit of the United
States Government. As insurer, the FDIC imposes deposit insurance premiums
and is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation
or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations,
after giving the OTS an opportunity to take such action, and may terminate
the deposit insurance of an institution if it determines that the
institution has engaged or is engaging in unsafe or unsound practices, or is
in an unsafe or unsound condition.
Both the SAIF and the Bank Insurance Fund (BIF), the federal deposit
insurance fund that covers the deposits of state and national banks and
certain state savings banks, are required by law to attain and maintain a
reserve ratio of 1.25% of the insured deposits. The BIF has achieved the
required reserve rate, and as a result, the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level substantially below
the average premium paid by savings institutions. Legislation was enacted
September 30, 1996 to eliminate the premium differential between SAIF-
insured institutions and BIF-insured institutions. The legislation provided
that all insured depository institutions with SAIF-assessable deposits as of
March 31, 1995 pay a special one-time assessment at 65.7 basis points to
recapitalize the SAIF. Based on its level of SAIF deposits at March 31,
1995, the Bank paid a tax deductible special assessment of $3.0 million in
November 1996, which was recorded as of September 30, 1996. The current
SAIF premium schedule ranges from 0% to .27% of deposits, down from .23% to
.31% of deposits as a result of the SAIF special assessment and is the same
as the schedule applicable to BIF-insured deposits. Under the system,
institutions classified as well capitalized and considered healthy pay the
lowest premium while institutions that are less than adequately capitalized
and considered of substantial supervisory concern pay the highest premium.
Based on its regulatory capital as of June 30, 1998, the Bank qualified as a
"well capitalized" institution, and is not currently assessed deposit
insurance premiums. All FDIC insured institutions are, however, subject to
an assessment on deposits to fund the repayment of obligations issued in the
1980's to help resolve the thrift crisis. The current assessment for SAIF-
insured deposits is 6.48 basis points and 1.30 basis points for BIF-insured
deposits. These assessments are subject to change based upon the level of
BIF and SAIF deposits. Beginning no later than the year 2000, the
assessment is anticipated to be about 2.5 basis points for both BIF- and
SAIF-insured institutions as a result of BIF-insured institutions fully
participating in the assessment.
The FDIC is authorized to increase assessment rates if it determines that
the reserve ratio of the SAIF will be less than the designated reserve ratio
of 1.25% of SAIF insured deposits. In setting these increased assessments,
the FDIC must seek to restore the reserve ratio to that designated reserve
level, or such higher reserve ratio as established by the FDIC. In
addition, the FDIC may impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
Regulatory Capital Requirements. Federally insured savings associations,
such as First Federal, are required to maintain a minimum level of
regulatory capital. Failure to meet minimum capital requirements can
initiate certain mandatory and possible discretionary actions by regulators,
which could have a direct material effect on the Bank's statement of
condition and results of operations. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weights and other factors.
The Bank's capital requirements include tangible capital, core capital and
total risk-based capital. Under the tangible capital requirement, a savings
association must maintain tangible capital in an amount equal to at least
1.5% of adjusted total assets. At June 30, 1998, the Bank had tangible
capital of $53.3 million, or 8.5% of adjusted total assets. Under the core
capital requirement, a savings association must maintain core capital in an
amount equal to at least 3.0% of adjusted total assets. At June 30, 1998,
the Bank had core capital of $53.3 million, or 8.5% of adjusted total
assets. Under the total risk-based capital requirement, a savings
association must maintain core capital equal to at least 4.0% of risk-
weighted assets and total capital equal to at least 8.0% of risk-weighted
assets. At June 30, 1998, the Bank had total risk-based capital of $54.9
million, or 14.3% of risk-weighted assets. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet items,
will be multiplied by a risk weight ranging from 0% to 100% based on the
risk inherent in the type of asset. For example, the OTS has assigned a
risk weight of 50% for prudently underwritten permanent one-to-four family
first lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to
such ratio by an insurer approved by FNMA or FHLMC. Refer to Note 8 of the
Notes to Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein regarding compliance with
regulatory capital requirements.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the
present value of its assets. This exposure is a measure of the potential
decline in the portfolio value of a savings association, greater than 2% of
the present value of its assets, based upon a hypothetical 200 basis point
increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts. The rule provides
for a two quarter lag between calculating interest value risk and
recognizing any deduction from capital. The OTS announced that it will
delay the effectiveness of the rule until it evaluates the implementation of
the process by which savings associations may appeal an interest rate risk
deduction determination. Any savings association with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from
this requirement unless the OTS determines otherwise. The Bank does not
anticipate that this final rule will affect its ability to meet its
regulatory capital requirements.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled
institutions. At each successively lower defined capital category, an
institution is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility
in determining how to resolve the problems of the institution. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if
it has total risk-based capital ratio of 10.0% or more, a Tier-1 risk-based
capital ratio of 6.0% or more, a Tier-1 leverage capital ratio of 5.0% or
more and is not subject to any order or final capital directive to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a
Tier-1 risk-based capital ratio of 4.0% or more, a Tier-1 leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet
the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier-1 risk-based
capital ratio that is less than 4.0% or a Tier-1 leverage capital ratio that
is less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier-1 risk-based capital ratio that is less than 3.0% or a
Tier-1 leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that
is equal to or less than 2.0%. Regulations also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution
as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category. An institution that is
significantly undercapitalized may not be reclassified as critically
undercapitalized. As of June 30, 1998, First Federal believes it qualifies
as a "well capitalized" institution under the prompt corrective action
rules.
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its
mutual to stock conversion. See Note 14 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders included as
Exhibit 13 herein.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account (see "-Regulatory
Capital Requirements").
Generally, Tier 1 associations, which are associations that before and after
the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater
of 100% of net income for the year-to-date plus 50% of the amount by which
the lesser of the association's "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements), as measured at the beginning
of the calendar year, or the amount authorized for a Tier 2 association.
However, a Tier 1 association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association
as a result of such a determination. First Federal meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before
and after the proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net income over
the most recent four quarter period. Tier 3 associations (which are
associations that do not meet current minimum capital requirements) that
propose to make any capital distribution and Tier 2 associations that
propose to make a capital distribution in excess of the noted safe harbor
level must obtain OTS approval prior to making such distribution. Tier 2
associations proposing to make a capital distribution within the safe harbor
provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Holding Company, First Federal is
required to give the OTS 30 days notice prior to declaring any dividend on
its stock. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. See Note 14 of the Notes to
Consolidated Financial Statements in the Annual Report to Stockholders
included as Exhibit 13 herein for a detail of distributions from the Bank to
the Holding Company.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered
structure and the safe-harbor percentage limitations. Under the proposal, a
savings association may make a capital distribution without notice to the
OTS (unless it is a subsidiary of a holding company) provided that it has a
CAMEL 1 or 2 rating, is not in troubled condition (as defined by regulation)
and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution, but do not meet the other noted requirements, must notify the
OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions
that do not exceed 50% of the institution's excess regulatory capital plus
net income to date during the calendar year. A savings association may not
make a capital distribution without prior approval of the OTS and the FDIC
if it is undercapitalized before, or as a result of, such a distribution.
As under the current rule, the OTS may object to a capital distribution if
it would constitute an unsafe or unsound practice. No assurance may be
given as to whether or in what form the regulations may be adopted. The
Bank does not anticipate that these regulations, as proposed, will affect
its ability to make capital distributions.
Liquidity. All savings associations, including First Federal, are required
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 requirement may vary from time to time depending upon economic
conditions and savings flows of all savings associations. In November 1997,
the OTS revised its liquidity rule to lower the minimum requirement from 5%
to 4%, the lowest level permitted by current law and eliminate the 1% short-
term liquidity requirement. The OTS also expanded the types of investments
considered to be liquid assets and removed the requirement that certain
investments must mature within 5 years in order to qualify as a liquid
asset. At June 30, 1998, the Bank was in compliance with the applicable
regulatory liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Cash Flows" contained in the Annual Report to Stockholders included as
Exhibit 13 herein.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment,
sale or trading) with appropriate documentation. First Federal is in
compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which may be
made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance
and inherent risk and that financial reports must incorporate any other
accounting regulations or orders prescribed by the OTS. First Federal is in
compliance with these amended rules.
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender (QTL) test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (which consists of
total assets less intangibles, properties used to conduct the savings
association's business and liquid assets not exceeding 20% of total assets)
in qualified thrift investments on a monthly average for nine out of every
12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets specified by Section 7701(a)(19) of the
Internal Revenue Code of 1986, as amended (the "Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At June 30, 1998, First Federal met the QTL test and has
always met the test since its effectiveness. At June 30, 1998, First
Federal's QTL percentage was 90.6%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains
a QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer
to the BIF. If such an association has not yet requalified or converted to
a national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition,
the association is immediately ineligible to receive any new FHLB borrowings
and is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all
restrictions on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act (CRA),
every FDIC-insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit
needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes
are best suited to its particular community, consistent with the CRA. The
CRA requires the OTS, in connection with the examination of First Federal,
to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as merger or the establishment of a branch, by First
Federal. An unsatisfactory rating may be used as the basis for the denial
of an application by the OTS.
Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA
compliance in May 1997 and received a rating of "satisfactory".
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on
terms as favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions are restricted to a percentage of
the association's capital. Affiliates of First Federal include the Holding
Company and any company which is under common control with First Federal.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the
securities of most affiliates. Affiliates do not generally include
subsidiaries, however, the OTS has the discretion to treat subsidiaries of
savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation. The Holding Company is a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such,
the Holding Company is required to register and file reports with the OTS
and is subject to regulation and examination by the OTS. In addition, the
OTS has enforcement authority over the Holding Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Holding Company generally
is not subject to activity restrictions. If the Holding Company acquires
control of another savings association as a separate subsidiary, it would
become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than the Bank or any
other SAIF-insured savings association) would become subject to such
restrictions, which generally limit activities to those related to
controlling a savings association, unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If First Federal fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or
through its other subsidiaries, any business activity other than those
approved for multiple savings and loan holding companies or their
subsidiaries. In addition, within one year of such failure the Holding
Company must register as, and will become subject to, the restrictions
applicable to bank holding companies. The activities authorized for a bank
holding company are more limited than are the activities authorized for a
unitary or multiple savings and loan holding company. See "- Qualified
Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings associations in more than one state. However,
such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings
association.
Federal Securities Law. The Common Stock of the Holding Company is
registered with the SEC under the Securities Exchange Act of 1934, as
amended (Exchange Act). The Holding Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of
the Exchange Act and the rules and regulations of the SEC thereunder.
The registration under the Securities Act of the Holding Company's Common
Stock does not cover the resale of such shares. Shares of Common Stock
purchased by persons who are not affiliates of the Holding Company may be
resold without registration. Shares purchased by an affiliate (generally
officers, directors and principal stockholders) of the Holding Company will
be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Holding Company meets the current public information requirements of
Rule 144 under the Securities Act, each affiliate of the Holding Company who
complies with the other conditions of Rule 144 (including those that require
the affiliate's sale to be aggregated with those of certain other persons)
would be able to sell in the public market, without registration, a number
of shares not to exceed a limited number of shares in any three-month
period.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1998, First Federal was in compliance with
these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.
The Bank had no discount window borrowings as of June 30, 1998.
Federal Home Loan Bank System. First Federal is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances)
in accordance with policies and procedures established by the board of
directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, First Federal is required to purchase and maintain stock in the
FHLB of Cincinnati. At June 30, 1998, First Federal had $4.5 million in
FHLB stock which was in compliance with this requirement. In past years,
First Federal has received substantial dividends on its FHLB stock. Over
the past five fiscal years, such dividends have averaged 6.8% and were 7.3%
for fiscal year 1998. For the year ended June 30, 1998, dividends paid by
the FHLB of Cincinnati to First Federal totaled $312,000 which represented a
$33,000 increase from the amount of dividends received in fiscal year 1997.
Under federal law the FHLBs are required to provide funds for the resolution
of troubled savings associations and to contribute to low- and moderately
priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock
in the future. A reduction in value of First Federal's FHLB stock may
result in a corresponding reduction in First Federal's capital.
Federal Taxation. Certain 1996 tax legislation significantly affected
thrift institutions such as the Bank regarding bad debt provisions. Large
thrifts (see below) were required to switch to the specific charge-off
method of Section 166 while small thrifts switched to the reserve method of
Section 585 (the method 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. The legislation eliminated the
percentage of taxable income method for computing additions to the thrift
tax bad debt reserves for tax years beginning after December 31, 1995 which
affected First Federal beginning in fiscal year ended June 30, 1997. The
legislation also required 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 were $3.4 million. The amount of the
reserves to be recaptured depends upon whether the institution is considered
a large institution for tax purposes. As the Bank has previously provided
deferred taxes on the recapture amounts, no additional financial statement tax
expense will result from the recapture.
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 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 June 30, 1997. 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.
For fiscal years 1997 and 1998, the Bank qualified for postponement of the
bad debt recapture.
The base year reserves and the supplemental reserve are not forgiven. These
reserves continue to be subject to the section 593(e) recapture penalty and
are treated as a section 381(c) attribute for purposes of certain corporate
acquisitions. There are other ancillary provisions affected by the repeal
of section 593, most notably the repeal of section 595 which provides
thrifts with special treatment on foreclosure of property securing loans.
Section 595 is repealed for property acquired in taxable years beginning
after December 31, 1995.
Under section 593(e), earnings appropriated for bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to pay
cash dividends or distributions to the Holding Company without the Bank
including the amount in taxable income, together with an amount deemed
necessary to pay the resulting income tax. Thus, any dividends to the Holding
Company that would reduce amounts appropriated to the Bank's bad debt reserves
and deducted for federal income tax purposes could create a tax liability for
the Bank. The Bank does not intend to pay dividends that would result in a
recapture of its bad debt reserves.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items,
less any available exemption. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax.
The Holding Company, FFY Holdings, Inc., the Bank and the Bank's subsidiary,
Ardent Service Corp. file consolidated federal income tax returns on a
fiscal year basis using the accrual method of accounting.
The Bank has been audited by the Internal Revenue Service with respect to
federal income tax returns through tax year 1991 and has federal income tax
returns which are open and subject to audit for the tax years 1995 through
1997. With respect to years examined by the IRS, all deficiencies have been
satisfied. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Company.
For additional information regarding federal taxation, see Note 11 of the
Notes to the Consolidated Financial Statements in the Annual Report to
Stockholders included as Exhibit 13 herein.
Ohio Taxation. As a federally chartered savings bank, the Bank is subject
to an Ohio franchise tax based on its net worth plus certain reserve
amounts. Total net worth for this purpose is reduced by certain exempted
assets. The resultant net worth was taxed at a rate of 1.5% for the 1998
return, which was based on net worth as of June 30, 1997. The Bank's state
franchise tax returns are open and subject to audit for the years 1995
through 1998.
The Holding Company is subject to the Ohio franchise tax on holding
companies of financial institutions. The tax imposed is the greater of the
tax on net worth after adjustments to exclude the portion attributable to
the financial institution or the tax on net income. The tax on net income
is computed on federal taxable income adjusted to exclude distributions from
the financial institution, and subject to certain other adjustments. The
rate of tax differs for the net worth and net income computations and can
include a surtax if based on net income and an add-on litter tax under
either method. The Company's state franchise tax returns are open and
subject to audit for the years 1995 through 1998.
Recent Ohio legislation will change the computation of tax and the rate of tax
for future years for both financial institutions and holding companies.
Delaware Taxation. As a Delaware holding company, the Holding Company is
exempted from Delaware corporate income tax but is required to file an
annual report with and pay an annual fee to the State of Delaware. The
Holding Company is also subject to an annual franchise tax imposed by the
State of Delaware.
Executive Officers of the Holding Company and the Bank
The following table sets forth certain information regarding executive
officers of the Holding Company and the Bank at June 30, 1998 who are not
also directors.
Age at Positions Held with Bank
Name June 30, 1998 and Holding Company
- ------------------------------------------------------------------
Therese Ann Liutkus 39 Treasurer and CFO of the Bank
and the Holding Company
David S. Hinkle 40 Vice President of the Bank
Mark S. Makoski 48 Vice President of the Bank
J. Craig Carr 50 Vice President and General Counsel
of the Bank and Holding Company
The business experience of the executive officers who are not also not
directors is set forth below.
Therese Ann Liutkus - Ms. Liutkus has served as Treasurer of the Bank and
Holding Company since January 1996 and March 1996, respectively, as well as
Chief Financial Officer of the Bank and Holding Company since October 1996.
Ms. Liutkus has also served as Treasurer of FFY Holdings, Inc. since
September 1997. Ms. Liutkus is responsible for the activities of the
securities portfolios and oversees the accounting functions. After joining
the Bank in 1986, Ms. Liutkus has served as the Bank's Internal Auditor
through 1989, and served as Accounting Manager of the Bank from 1990 to
1995. She earned a BBA degree in accounting from Cleveland State University
is a Certified Public Accountant and member of both the American Institute
of CPAs and Ohio Society of CPAs.
David S. Hinkle - Mr. Hinkle has served as Vice President of the Bank since
January 1996. Mr. Hinkle is responsible for overall Bank operations
including information systems (including Year 2000 compliance), check
processing facilities management, purchasing and courier services. He began
his career with the Bank in 1979 as a member of the data processing
department and was appointed an Assistant Treasurer in 1982. He earned a
Bachelor of Science degree in Management in 1981 from Youngstown State
University. Mr. Hinkle is a member of the Board of Directors for Humility
of Mary Information Systems.
Mark S. Makoski - Mr. Makoski has served as Vice President of the Bank since
January 1996. Mr. Makoski is responsible for marketing, sales and deposits
of the Bank. He has served in various capacities since joining the Bank in
1982, including Internal Auditor from 1982 through 1986, Assistant
Treasurer from 1987 through 1991 and Assistant Vice President from 1992
through 1995. He earned a Bachelor of Science degree in Business
Administration from Milligan College in Tennessee. Mr. Makoski belongs to
the Canfield Fair Board, Mahoning County Securities Officers Group and
Austintown Rotary.
J. Craig Carr - Mr. Carr has served as Vice President of the Bank and
Holding Company since July 1997, Assistant Vice President of the Bank from
1991 to June 1997 and General Counsel since joining the Bank in 1974. Mr.
Carr has also served as Vice President of FFY Holdings and Ardent Service
Corp. since September 1997. Mr. Carr conducts the general legal work of the
Bank, supervises the in-house title department and advises and counsels all
officers and departments. He earned a Bachelor of Arts degree in Political
Science from Miami University of Ohio and Juris Doctor Degree from Ohio
State University College of Law. Mr. Carr is a member of the Ohio State and
Mahoning County Bar Associations.
Item 2. Properties
The Bank owns its main office building. At June 30, 1998, the Bank owned
six of its branch offices and the remaining six branch offices, including
two limited service facilities, were leased. As of June 30, 1998, the net
book value of the Bank's investment in premises, equipment and leaseholds,
excluding computer equipment and software, was approximately $6.7 million.
The Bank's accounting and record keeping activities are maintained on an in-
house data processing system. The Bank owns data processing equipment it
uses for its internal processing needs. The net book value of such data
processing equipment and related software, including the new comprehensive
software system to run the core banking operation (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Year 2000" contained in the Annual Report to Shareholders included as
Exhibit 13 herein) was $1.1 million at June 30, 1998.
Item 3. Legal Proceedings
First Federal is involved as plaintiff or defendant in various legal actions
arising in the normal course of business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing First Federal in
the proceedings, that the resolution of these proceedings should not have a
material effect on the Bank's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30,
1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information under the caption "Market Prices and Dividends Declared" on
page 18 of the 1998 Annual Report to Stockholders which portions attached
hereto as Exhibit 13 is herein incorporated by reference.
Item 6. Selected Financial Data
Pages 4 through 6 of the 1998 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 7 through 19 of the 1998 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pages 14 and 15 of the 1998 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 20 through 42 of the 1998 Annual Report to Stockholders which portions
attached hereto as Exhibit 13 are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of the Holding Company and the Bank
Information regarding the executive officers of the Holding Company and the
Bank who are not directors is contained in Part I of this Form 10-K and
incorporated herein by reference.
Directors of the Holding Company and the Bank
Information concerning Directors of the Holding Company and the Bank is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which has been
filed with the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
Information concerning compliance with the reporting requirements of Section
16(a) of the Securities and Exchange Act of 1934 by the Holding Company's
directors, officers and greater than 10% beneficial owners is incorporated
herein by reference from the definitive proxy statement for the Annual
Meeting of Stockholders to be held in 1998, a copy of which has been filed
with the Securities and Exchange Commission.
Under the federal securities laws, Holding Company directors, certain
officers and 10% shareholders are required to report to the Securities and
Exchange Commission, by specific due dates, transactions and holdings in the
Holding Company stock. The Bank believes that during fiscal year 1998, all
of these filing requirements were satisfied, except for the inadvertent
omission of an option exercise by Director Izzo-Cartwright, which omission
has been subsequently corrected.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, a copy of which has been filed with the
Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1998, a copy
of which has been filed with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which has been
filed with the Securities and Exchange Commission.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following information appearing in the Holding Company's Annual Report
to Stockholders for the year ended June 30, 1998, is incorporated by
reference in this Annual Report on Form 10-K as Exhibit 13.
Pages in
Annual Report Section Annual Report
- -----------------------------------------------------------------------
Selected Financial Data and Other Data 4-6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-19
Common Stock and Related Information 18
Consolidated Statements of Financial Condition as of
June 30, 1998 and 1997 20
Consolidated Statements of Income for Years Ended
June 30, 1998, 1997 and 1996 21
Consolidated Statements of Changes in Stockholders'
Equity for Years Ended June 30, 1998, 1997 and 1996 22-23
Consolidated Statements of Cash Flows for Years Ended
June 30, 1998, 1997 and 1996 24
Notes to Consolidated Financial Statements 25-41
Independent Auditors' Report 42
With the exception of the aforementioned information, the Holding Company's
Annual Report to Stockholders for the year ended June 30, 1998 is not deemed
filed as part of this Annual Report on Form 10-K.
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Consolidated
Financial Statements.
(a) (3) Exhibits
Reference to
Prior Filing
Regulation or Exhibit
S-K Number
Exhibit Attached
Number Document Herein
- -------------------------------------------------------------------------------
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3(i) Articles of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of security holders,
including indentures *
9 Voting trust agreement None
10 Material contracts
Executive Compensation Plans and Arrangements *
Employment Contracts *
Recognition and Retention Plan and Trust Stock
Option and Incentive Plan *
11 Statement re: computation of per share earnings None
12 Statement re: computation of ratios Not required
13 Annual Report to security holders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
21 Subsidiaries of registrant 21
22 Published report regarding matters submitted to vote
of security holders None
23 Consents of experts and counsel 23
24 Power of attorney Not required
27 Financial Data Schedule 27
99 Additional Exhibits - predecessor accountants'
independent auditors' report None
- --------------------
<F*> Filed as exhibits to the Corporation's Form S-1 registration statement
filed on March 12, 1993 (File No. 33-59482) pursuant to Section 5 of
the Securities Act of 1933, as amended. All of such previously filed
documents are hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
During the quarter ended on June 30, 1998, the Holding Company filed a
report on Form 8-K on April 23, 1998 announcing third quarter earnings and
the regular quarterly dividend.
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
By: /s/ Jeffrey L. Francis
-----------------------------------
Jeffrey L. Francis, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Jeffrey L. Francis /s/ Therese Ann Liutkus
- --------------------------------------- --------------------------------------
Jeffrey L. Francis, President, Therese Ann Liutkus, Treasurer and CFO
Chief Executive Officer and Director (Principal Financial and Accounting Officer)
(Principal Executive and Operating Officer) Date: September 25, 1998
Date: September 25, 1998
/s/ Randy Shaffer /s/ Myron S. Roh
- --------------------------------------- --------------------------------------
Randy Shaffer, Vice President and Myron S. Roh, Chairman of the Board
Director and Director
Date: September 25, 1998 Date: September 25, 1998
/s/ A. Gary Bitonte /s/ Jack R. Brownlee
- --------------------------------------- -------------------------------------
A. Gary Bitonte, Director Jack R. Brownlee, Director
Date: September 25, 1998 Date: September 25, 1998
/s/ Marie Izzo Cartwright /s/ Daniel J. Mirto
- --------------------------------------- -------------------------------------
Marie Izzo Cartwright, Director Daniel J. Mirto, Director
Date: September 25, 1998 Date: September 25, 1998
/s/ Henry P. Nemenz /s/ W. Terry Patrick
- --------------------------------------- -------------------------------------
Henry P. Nemenz, Director W. Terry Patrick, Director
Date: September 25, 1998 Date: September 25, 1998
/s/ Ronald P. Volpe
- ---------------------------------------
Ronald P. Volpe, Director
Date: September 25, 1998