UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 Corp.
(Exact name of registrant as specified in its charter)
Delaware 34-1735753
(State of Incorporation) (IRS Employer Identification No.)
724 Boardman-Poland Road, Youngstown, Ohio
(Address of principal executive office)
44512
(Zip Code)
(330) 726-3396
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT OCTOBER 30, 1998
----- --------------------------------------
common stock, $.01 par value 3,929,010
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders'
Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
1998 June 30,
(unaudited) 1998
------------- --------
Assets
Cash $ 5,484,828 $ 4,362,127
Interest-bearing deposits 10,982,531 5,713,055
Short-term investments 1,225,000 -
------------------------------
TOTAL CASH AND CASH EQUIVALENTS 17,692,359 10,075,182
Securities available for sale 151,355,104 140,793,201
Loans receivable 468,554,013 482,463,396
Loans available for sale 1,724,800 -
Interest and dividends receivable on
securities 1,706,315 1,421,574
Interest receivable on loans 2,732,829 2,698,117
Federal Home Loan Bank stock, at cost 4,592,700 4,511,500
Office properties and equipment, net 7,725,189 7,920,660
Other assets 2,507,562 1,862,863
------------------------------
TOTAL ASSETS $658,590,871 $651,746,493
==============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $448,498,023 $444,017,422
Securities sold under agreements to
repurchase:
Short-term 9,020,880 13,088,323
Long-term 51,300,000 51,300,000
Borrowed funds:
Short-term 29,500,000 33,985,000
Long-term 25,000,000 -
Advance payments by borrowers for taxes
and insurance 1,184,408 2,621,514
Other payables and accrued expenses 9,960,527 22,518,533
------------------------------
TOTAL LIABILITIES 574,463,838 567,530,792
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized 5,000,000 shares; none
outstanding - -
Common stock, $.01 par value:
Authorized 15,000,000 shares;
issued 6,630,000 shares, outstanding
3,960,510 shares at September 30, 1998
and 4,010,990 shares at June 30, 1998 66,300 66,300
Additional paid-in capital 65,152,117 65,118,141
Retained earnings, substantially restricted 80,573,982 79,428,438
Treasury stock, at cost, 2,669,490 shares at
September 30, 1998 and 2,619,010 shares at
June 30, 1998 (59,851,807) (57,893,563)
Accumulated other comprehensive income 1,405,533 812,737
Common stock purchased by:
Employee Stock Ownership and 401(k) Plan (2,937,302) (3,034,562)
Recognition and Retention Plans (281,790) (281,790)
------------------------------
TOTAL STOCKHOLDERS' EQUITY 84,127,033 84,215,701
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $658,590,871 $651,746,493
==============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
September 30,
----------------------------
1998 1997
---- ----
Interest Income
Loans $ 9,969,896 $ 9,906,611
Securities available for sale 2,069,296 1,852,690
Federal Home Loan Bank stock 83,927 76,173
Other interest-earning assets 38,147 123,063
----------------------------
TOTAL INTEREST INCOME 12,161,266 11,958,537
----------------------------
Interest Expense
Deposits 5,213,591 5,503,230
Securities sold under agreements to
repurchase:
Short-term 147,555 217,055
Long-term 749,624 389,722
Borrowed funds:
Short-term 446,951 365,069
Long-term 153,542 -
----------------------------
TOTAL INTEREST EXPENSE 6,711,263 6,475,076
NET INTEREST INCOME 5,450,003 5,483,461
Provision for loan losses 125,417 142,395
----------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,324,586 5,341,066
----------------------------
Non-Interest Income
Service charges 198,202 169,886
Gain on sale of securities available for
sale 64,255 48,239
Other 355,227 109,600
----------------------------
TOTAL NON-INTEREST INCOME 617,684 327,725
----------------------------
Non-Interest Expense
Salaries and employee benefits 1,580,558 1,416,464
Net occupancy and equipment 500,441 419,608
Insurance and bonding 124,419 121,253
State and local taxes 267,416 275,859
Other 672,896 527,527
----------------------------
TOTAL NON-INTEREST EXPENSE 3,145,730 2,760,711
----------------------------
INCOME BEFORE
FEDERAL INCOME TAXES 2,796,540 2,908,080
Federal income taxes 912,000 1,005,000
----------------------------
NET INCOME $ 1,884,540 $ 1,903,080
============================
BASIC EARNINGS PER SHARE $ 0.51 $ 0.50
============================
DILUTED EARNINGS PER SHARE $ 0.50 $ 0.49
============================
CASH DIVIDENDS DECLARED PER SHARE $ 0.225 $ 0.20
============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Three months ended
September 30,
-----------------------------
1998 1997
---- ----
Balance at July 1 $84,215,701 $82,174,216
Net income 1,884,540 1,903,080
Dividends paid, $.20 and $.175 per share,
respectively (738,996) (659,936)
Treasury stock purchased (2,350,715) (776,611)
Stock options exercised 176,400 68,100
Amortization of KSOP expense 97,260 101,700
Tax benefit related to exercise of stock
options 38,821 13,155
Difference between average fair value per share
and cost per share on KSOP shares committed
to be released 211,226 171,669
Change in unrealized holding gain on securities
available for sale, net 592,796 666,268
------------------------------
Balance at September 30 $84,127,033 $83,661,641
==============================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
September 30,
------------------------------
1998 1997
---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,937,461 $ 5,196,872
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities
available for sale 1,903,169 4,000,000
Proceeds from sales of securities available
for sale 8,012,544 7,269,313
Purchase of securities available for sale (44,880,298) (22,030,046)
Principal receipts on securities available
for sale 9,086,856 3,917,708
Net (increase) decrease in loans 12,303,503 (2,407,415)
Purchase of office properties and equipment (79,458) (84,483)
Other, net (80,170) (350,740)
------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,733,854) (9,685,663)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 4,508,324 (1,141,027)
Net increase (decrease) in short-term
securities sold under agreements to
repurchase (4,113,758) 12,658,882
Net increase (decrease) in borrowed funds
Short-term (4,485,000) (6,255,000)
Long-term 25,000,000 -
Decrease in advance payments by borrowers
for taxes and insurance (1,437,106) (1,308,225)
Increase (decrease) in amounts due to bank 140,648 (612,058)
Treasury stock purchases (2,350,715) (776,611)
Dividends paid (738,996) (659,936)
Proceeds from stock options exercised 176,400 68,100
Other, net (286,227) (438,964)
------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,413,570 1,535,161
------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 7,617,177 (2,953,630)
CASH AND CASH EQUIVALENTS
Beginning of period 10,075,182 10,007,755
------------------------------
End of period $ 17,692,359 $ 7,054,125
==============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments of interest expense $ 4,543,512 $ 4,229,878
Cash payments of income taxes - 350,000
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation:
The interim consolidated financial statements of the Company include
the accounts of FFY Financial Corp. (FFY or Holding Company) and its
wholly-owned subsidiaries First Federal Savings Bank of Youngstown
(First Federal or Bank) and FFY Holdings, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Basis of Presentation:
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's 1998 Annual Report to Shareholders
incorporated by reference into the Company's 1998 Annual Report on
Form 10-K. The interim consolidated financial statements include all
adjustments (consisting of only normal recurring items) which, in the
opinion of management, are necessary for a fair presentation of the
financial position and results of operations for the periods
presented. The results of operations for the interim periods
disclosed herein are not necessarily indicative of the results that
may be expected for a full year.
(c) Earnings Per Share:
The computation of basic and diluted earnings per share is shown in
the following table.
Three months ended
September 30,
--------------------------
1998 1997
---- ----
Basic earnings per share computation:
Numerator - Net income $1,884,540 $1,903,080
Denominator - Weighted average common
shares outstanding 3,677,742 3,782,339
Basic earnings per share $ 0.51 $ 0.50
==========================
Diluted earnings per share computation:
Numerator - Net income $1,884,540 $1,903,080
Denominator - Weighted average common
shares outstanding 3,677,742 3,782,339
Dilutive effect of stock
options 124,134 137,074
--------------------------
Weighted average common
shares and common stock
equivalents 3,801,876 3,919,413
Diluted earnings per share $ 0.50 $ 0.49
==========================
(d) Reclassifications:
Certain amounts in the prior period consolidated financial statements
have been reclassified to conform with the current period's
presentation.
(2) EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
On July 1, 1998, the Company adopted to provisions of SFAS No. 130,
Reporting Comprehensive Income. This statement establishes standards
for reporting and display of comprehensive income and its components.
Comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries
to equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension
liability adjustments. At the Company, comprehensive income
represents net income plus other comprehensive income net of taxes,
which consists of the net change in unrealized gains or losses on
securities available for sale for the period. Accumulated other
comprehensive income represents the net unrealized gains or losses on
securities available for sale as of the balance sheet dates.
Comprehensive income for the three month periods ended September 30,
1998 and 1997 was $592,796 and $666,268, respectively.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 requires
public business enterprises to report certain financial and
descriptive information about operating segments. This statement also
establishes standards for related disclosures about products and
services, any major customers, and geographic areas in which an
enterprise operates. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No.
131 was adopted July 1, 1998 and management will determine its impact
prior to the initial application of the statement's provisions on June
30, 1999.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, an Amendment of FASB
Statements No. 87, 88 and 106. This statement amends disclosure
requirements with respect to pensions and other postretirement
benefits. It does not change any of the current guidance on
measurement or recognition related to these areas. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The
implementation of SFAS No. 132 will require revised disclosure in the
Company's June 1999 fiscal year-end and future financial statements,
but will not otherwise affect the Company.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement standardizes the
accounting for derivative contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of
financial condition and measure them at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. Management
is currently evaluating the effects SFAS No. 133 will have on the
Company's financial condition or results of operations.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. SFAS
No. 134 is an amendment of FASB Statement No. 65, which establishes
accounting and reporting standards for certain activities of mortgage
banking enterprises and other enterprises that conduct operations that
are substantially similar to the primary operations of a mortgage
banking enterprise. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. Management will evaluate
the impact of SFAS No. 134, but implementation of this statement
should not otherwise affect the Company.
PART I: FINANCIAL INFORMATION
FFY FINANCIAL CORP.
SEPTEMBER 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended September 30, 1998
for the Company.
Forward-Looking Statements
When used in this Form 10-Q, 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.
Year 2000
First Federal is highly dependent on the accuracy of computers and computer
programs. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define an applicable year. Any
of a company's hardware, date-driven automated equipment, or computer
programs that have date sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This improper recognition could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in normal business activities. The Company's
Technology and Facilities Committee is responsible for monitoring and
achieving Year 2000 compliance for the Company and oversees a Y2K Committee.
The Y2K Committee is headed by the Bank's Vice President of Operations and
consists of members from the Bank's internal audit, information systems and
user departments.
Over the past two years, the Company has been addressing Year 2000 issues.
A significant part of Year 2000 compliance was converting the Bank's
financial computer system to a new comprehensive software system to run the
core banking operation. The conversion was successfully completed on April
27, 1998. The Company believes that the new financial computer system is
Year 2000 compliant. Additionally, this new system allows First Federal to
enhance its current services. It was determined that the Bank's previous
financial computer system would be too costly to make Year 2000 compliant
and would hinder other program development. Another significant part of the
Company's Year 2000 issues includes contacting significant third party
vendors who are required to provide evidence of their efforts to become Year
2000 compliant. Management has evaluated each of the Company's significant
vendor's Year 2000 compliance progress and considers them to be satisfactory.
Management plans to have ongoing communications with such vendors to insure
Year 2000 compliance. Although the Company has been assured the readiness of
its financial computer system and significant vendor's systems for the Year
2000, the Y2K Committee is currently testing or plans to test such systems for
Year 2000 readiness for further assurance. The Company plans to substantially
complete the Year 2000 readiness project by June 30, 1999.
The Company has incurred cash outlays of approximately $505,000, including
$429,000 for the new comprehensive software system, in connection with the
Year 2000 readiness project. Management estimated that the total cost of
Year 2000 compliance issues to be approximately $1.0 million, which is being
funded through operations. The total cost of the Year 2000 project is not
expected to have a material impact on the Company's results of operations.
The Company faces several risk factors with respect to the Year 2000. For
example, the ability of First Federal's loan customers to repay their
obligations could be affected by business interruptions caused by Year 2000
problems. The potential impact on First Federal of such problems has not
been determined, but could be significant in that customers may be unable to
repay their obligations. The Company is also vulnerable to its significant
vendors Year 2000 issues with respect to their major suppliers and their own
Year 2000 issues.
The Company is currently working on a written contingency plan and expects
to complete it by June 30, 1999. The plan is being developed for a general
failure of the Company's systems and specific contingency plans will be
developed for each critical application and vendor. The Company does
currently have contingency plans to replace those significant vendors that
may have Year 2000 difficulties in addition to replacing those vendors or
suppliers the Company cannot test.
The dates and costs of the Year 2000 remediation process are based on
management's best estimates. Management believes that the Company's Year
2000 efforts will be resolved on a timely and cost-efficient basis and does
not anticipate that the Company's additional efforts regarding Year 2000
compliance will have a material impact on the Company's financial condition,
results of operations, liquidity and capital resources. There can be no
guarantee, however, that such estimates and assumptions will be achieved and
actual results could differ materially from those estimates.
Financial Condition
General. Total assets at September 30, 1998 were $658.6 million compared to
$651.7 million at June 30, 1998, an increase of $6.9 million, or 1.1%. The
increase was primarily attributable to increases in cash and cash
equivalents, primarily interest-bearing deposits, and securities available
for sale, partially offset by a decline in loans receivable. Total
liabilities at September 30, 1998 were $574.5 million compared to $567.5
million at June 30, 1998, an increase of $7.0 million, or 1.2%. The
increase was primarily attributable to increases in deposits and borrowings,
partially offset by declines in short-term securities sold under agreements
to repurchase (repurchase agreements) and other payables and accrued
expenses.
Cash and Cash Equivalents. The Company's cash and cash equivalents totaled
$17.7 million at September 30, 1998, an increase of $7.6 million from $10.1
million at June 30, 1998. The increase in cash and cash equivalents was
primarily attributable to funds obtained from sales of securities in late
September 1998 which funds were subsequently reinvested in higher-yield
securities in October 1998. Funds not utilized for securities, lending
programs or operations are held in interest-bearing deposits.
Securities. The Company's securities portfolio increased $10.6 million, or
7.5%, during the first quarter of fiscal year 1999, and totaled $151.4
million at September 30, 1998 compared to $140.8 million at June 30, 1998.
The increase over the three month period primarily consisted of security
purchases totaling $28.8 million partially offset by $7.9 million, $1.9
million and $9.1 million in sales, maturities and principal receipts on
mortgage-backed securities, respectively. To a lesser extent, an increase
in the unrealized holding gain of securities partially offset by premium
amortization contributed to the $10.6 million increase. The increase in
securities was primarily funded by increased borrowings.
Loans. Net loans receivable, including loans available for sale, declined
$12.2 million, or 2.5%, and totaled $470.3 million at September 30, 1998
compared to $482.5 million at June 30, 1998. The decline in the loan
portfolio was primarily due to repayments on $17.1 million in short-term
consumer loans made to customers in June 1998 to fund their stock
subscriptions in a local financial institution's initial public offering.
Adjustable-rate loans continue to grow within the Bank's loan portfolio. At
September 30, 1998, adjustable-rate loans totaled 35.8% of gross loans
compared to 32.5% of gross loans at June 30, 1998. Management's effort to
minimize the impact of interest rate changes is reflected in the increase in
adjustable-rate loans, primarily in the one-to-four family portfolio. The
Bank's loan portfolio composition continued to be primarily in one-to-four
family mortgages, representing 73.2% of the gross loan portfolio at
September 30, 1998 compared to 71.7% of the gross loan portfolio at June 30,
1998.
Loan originations during the current quarter totaled $39.9 million compared
to $56.8 million during the quarter ended June 30, 1998, of which $17.1
million were short-term loans originated in June 1998 - see above. Mortgage
loans for the purchase, construction or refinance of one-to-four family
homes in the Bank's market continued to represent the largest segment of its
loan originations. During the three months ended September 30, 1998, one-
to-four family loan originations, including the construction of one-to-four
family homes were $24.6 million, or 61.7% of total originations; multi-
family residential, commercial real estate and development loan originations
were $5.6 million, or 14.1% of total originations; and consumer loan
originations were $9.7 million, or 24.2% of total originations.
The Bank's secondary market mortgage lending operation is designed to
originate and sell qualifying loans to Federal National Mortgage Association
(FNMA) in an effort to access that portion of the mortgage market that is
currently serviced by secondary market lenders. Currently, the Bank only
sells fixed-rate loans to FNMA. The Bank sold 51 loans during the first
three months of the current year, resulting in a pre-tax gain of $94,000.
This compares to sales of 17 and 49 loans for the three months ended March
31, 1998 and June 30, 1998, respectively, resulting in pre-tax gains of
$33,000 and $101,000, respectively. The secondary market lending operation
began in January 1998. Management anticipates increased activity in
secondary market mortgage lending as long as market conditions dictate it to
be profitable.
Deposits. Deposits increased $4.5 million, or 1.0%, during the first
quarter of fiscal year 1999 and totaled $448.5 million at September 30, 1998
compared to $444.0 million at June 30, 1998. Deposit outflows occurred
during June 1998 as a result of customers funding their stock subscriptions
in an initial public offering by a local financial institution. However,
since June 30, 1998, the Bank was successful in obtaining funds by offering
a short-term (four-month) certificate of deposit special which accumulated a
balance of $10.3 million at September 30, 1998. Overall, certificate
accounts increased $6.2 million since June 30, 1998. First Federal also
introduced a new money market product in November 1997 for customers who are
generally interest rate conscious and want to keep their funds liquid. At
September 30, 1998, this new money market product had a balance of $14.0
million compared to a balance of $11.5 million at June 30, 1998. Overall,
money market accounts increased $1.7 million since June 30, 1998. Passbook
and NOW accounts declined $2.5 million and $923,000, respectively, over the
first quarter of fiscal year 1999. The weighted average rate on deposits
was 4.57% and 4.63% at September 30, 1998 and June 30, 1998, respectively.
Repurchase Agreements. Short-term repurchase agreements declined $4.1
million during the first quarter of fiscal year 1999 and totaled $9.0
million at September 30, 1998 compared to $13.1 million at June 30, 1998.
The reduction in short-term repurchase agreements was funded by the increase
in deposits.
Borrowed Funds. Borrowed funds increased $20.5 million during the first
quarter of fiscal year 1999 and totaled $54.5 million at September 30, 1998
compared to $34.0 million at June 30, 1998. Both short- and long-term
borrowings consist of advances from the Federal Home Loan Bank (FHLB) of
Cincinnati. Such borrowings are generally used for liquidity purposes and
interest-earning asset growth not funded by core deposits. The long-term
advance from FHLB will mature in August 2000 and the rate is tied to 3-month
LIBOR and adjusts quarterly. Borrowed funds are managed within the
Company's guidelines for asset/liability management, profitability and
overall growth objectives.
Other Liabilities. Other payables and accrued expenses declined $12.5
million during the first quarter of fiscal year 1999, primarily funded by
short-term loan repayments in July 1998, and totaled $10.0 million at
September 30, 1998 compared to $22.5 million at June 30, 1998. The decline
was primarily due to $16.1 million in securities purchases recorded on the
trade date in June 1998 that did not settle until July 1998. This decline
was partially offset by increases of $1.0 million and $2.3 million in
accrued federal income taxes and accrued interest on deposits, respectively.
Stockholders' Equity. Total stockholders' equity declined $89,000 during
the first quarter of fiscal year 1999 and totaled $84.1 million at September
30, 1998 compared to $84.2 million at June 30, 1998. This decline resulted
principally from stock repurchases and dividends paid to shareholders
totaling $2.4 million and $739,000, respectively, partially offset by net
income for the three months ended September 30, 1998 of $1.9 million,
increased holding gains on available-for-sale securities of $593,000 and
other increases of $524,000 consisting of stock option exercises,
amortization and tax benefits associated with employee benefits and KSOP
accounting. On October 7, 1998, the Company announced its intention to
repurchase an additional 5%, or 198,026 shares of its outstanding common
stock in open market transactions over a twelve month period beginning
October 13, 1998. Tangible book value per share increased from $20.98 per
share at June 30, 1998 to $21.23 per share at September 30, 1998.
Results of Operations
Comparison of the Three Months Ended September 30, 1998 and 1997
General. The Company recorded net income of $1.9 million, or $0.50 per
diluted share for the three months ended September 30, 1998 compared to net
income of $1.9 million, or $0.49 per diluted share for the same three month
period last year. The Company's annualized return on average assets and
return on average equity for the three month ended September 30, 1998 were
1.16% and 9.10%, respectively, compared to 1.25% and 9.24% for the three
months ended September 30, 1997.
Interest Income. Interest income totaled $12.2 million for the three months
ended September 30, 1998 compared to $12.0 million for the three months
ended September 30, 1997, representing an increase of $203,000 or 1.7%. The
increase in interest income for the current three-month period over the same
period last year was primarily volume increases in securities and loans,
partially offset by yield declines in securities and loans. The average
balance of loans increased $9.9 million, reflecting continued loan growth,
and the average balance of securities increased $31.2 million, reflecting
increases in Federal agency obligations, tax-exempt securities and trust
preferred securities. The increase in the average balance of securities was
primarily funded with increases in repurchase agreements and borrowings.
The decline in yields of securities and loans was largely the result of high
loan prepayments on mortgage-backed securities and loan refinances.
Interest Expense. Interest expense totaled $6.7 million for the three
months ended September 30, 1998 compared to $6.5 million for the three
months ended September 30, 1997, representing an increase of $236,000, or
3.6%. The increase in interest expense for the current three-month period
over the same period last year was primarily volume increases in long-term
repurchase agreements and short- and long-term borrowed funds. These volume
increases were partially offset by declines in volume and rate in deposit
accounts and a volume decline in short-term repurchase agreements. The
average balance of long-term repurchase agreements and borrowed funds
increased $26.3 million and $15.9 million, respectively, whereas the average
balance of deposits and short-term repurchase agreements declined $4.7
million and $4.1 million, respectively. The weighted average rate of
deposit accounts declined 21 basis points, from 4.89% for the three months
ended September 30, 1997 to 4.68% for the three months ended September 30,
1998 due to a reduction in market rates.
Net Interest Income. Net interest income declined $33,000, or 0.6%, and
totaled $5.5 million for both the three months ended September 30, 1998 and
1997. The Company's net interest margin (net interest income as a
percentage of average interest-earning assets) was 3.58% for the three
months ended September 30, 1998, down 18 basis points from 3.76% for the
three months ended September 30, 1997. The decline in net interest margin
was due mainly to the current interest rate environment and growth in
average interest-earning assets funded by increased borrowings and
repurchase agreements. These sources of funds tend to have a higher cost
than core deposits.
Provision for Loan Losses. The provision for loan losses totaled $125,000
for the three months ended September 30, 1998 compared to $142,000 for the
same period last year. This $17,000 decline reflected management's
evaluation of the underlying credit risk of the Bank's loan portfolio to
provide for an adequate level of allowance for loan losses. The allowance
for loan losses at September 30, 1998 totaled 70.8% and 0.6% of non-
performing assets and gross loans outstanding, respectively. This compares
to an allowance for loan losses totaling 82.4% and 0.6% of non-performing
assets and gross loans outstanding, respectively, at June 30, 1998. Future
additions to the allowance for loan losses will be dependent on a number of
factors, including the performance of the Bank's loan portfolio, the
economy, changes in interest rates and the effect of such changes on real
estate values and inflation. Management believes that the allowance for
loan losses was adequate at September 30, 1998.
Non-Interest Income. Total non-interest income increased $290,000 compared
to the same prior year period and totaled $618,000 for the three months
ended September 30, 1998. Largely contributing to this increase was the
activities of FFY Holdings, Inc., which include real estate brokerage
services and insurance sales through its two respective affiliations.
Additionally, gains from loan sales from First Federal's secondary market
mortgage operation, which began in January 1998, largely contributed to the
increase.
Non-Interest Expense. Total non-interest expense increased $385,000
compared to the same prior year period and totaled $3.1 million for the
three months ended September 30, 1998. Expenses related to the activities
of FFY Holding's real estate and insurance affiliates largely contributed to
this increase. The Company's efficiency ratio (operating expenses excluding
goodwill amortization as a percentage of net interest income plus non-
interest income excluding gains/losses from securities sales) totaled 52.4%
for the three months ended September 30, 1998 compared to 47.9% for the
three months ended September 30, 1997. Excluding the effect of the
affiliates, the Company's efficiency ratio for the three months ended
September 30, 1998 would have been 50.6% compared to 47.9% for the same
period last year.
Federal Income Taxes. Federal income taxes declined $93,000 compared to the
same prior year period and totaled $912,000 for the three months ended
September 30, 1998. The decline in federal income taxes was due to a
decrease in pre-tax earnings and a decrease in the Company's effective tax
rate. The Company's effective tax rate for the three months ended September
30, 1998 was 32.6% compared to 34.6% for the three months ended September
30, 1997. The decrease in the effective tax rate is attributable to
increased income from tax-exempt securities.
Effect of New Accounting Standards
Refer to Note 2 of the Notes to Consolidated Financial Statements contained
in this report.
Liquidity and Cash Flows
In general terms, liquidity is a measurement of the Company's ability to
meet its cash needs. For example, the Company seeks to be able to meet loan
commitments, purchase securities or to repay deposits and other liabilities
in accordance with their terms without an adverse impact on current or
future earnings. The Company's principal sources of funds are deposits,
amortization and prepayments of loans, maturities, sales and principal
receipts of securities, borrowings, repurchase agreements and operations.
New federal regulations, which became effective November 24, 1997, require
the Bank to maintain minimum levels of liquid assets in each calendar
quarter of not less than 4% of either (i) its liquidity base at the end of
the preceding quarter, or (ii) the average daily balance of its liquidity
base during the preceding quarter. The new federal regulations decreased
the minimum liquidity requirement from 5%, removed the 1% short-term
liquidity requirement, expanded categories of liquid assets and reduced the
liquidity base. The Bank's liquidity substantially exceeded the applicable
liquidity requirement at September 30, 1998. Simply meeting the liquidity
requirement does not automatically mean the Bank has sufficient liquidity
for a safe and sound operation. The new final rule includes a separate
requirement that each thrift must maintain sufficient liquidity to ensure
its safe and sound operation. Thus, adequate liquidity may vary depending
on the Bank's overall asset/liability structure, market conditions, the
activities of competitors, and the requirements of its own deposit and loan
customers. Management believes the Bank's liquidity is sufficient.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and securities
and (iv) the objective of its asset/liability management program. Along
with its liquid assets, the Bank has additional sources of liquidity
available including, but not limited to, loan repayments, the ability to
obtain deposits through offering above market interest rates and access to
advances from the Federal Home Loan Bank (FHLB).
The primary investing activities of the Bank and/or Company are originating
loans and purchasing securities. A decline in the Bank's loan portfolio
provided $12.3 million whereas the growth in the securities portfolio used
$25.9 million during the three months ended September 30, 1998. The decline
in loans was the result of current period payoffs of short-term loans
outstanding at June 30, 1998 - see "Financial Condition" above. Generally,
during periods of general interest rate declines, the Bank would be expected
to experience increased loan prepayments, which would likely be reinvested
at lower interest rates. During a period of increasing interest rates, loan
prepayments would be expected to decline, reducing funds available for
investment at higher interest rates.
The primary financing activities of the Bank are deposits, repurchase
agreements and borrowings. Deposit accounts and borrowed funds provided
$4.5 million and $20.5 million, respectively, during the three months ended
September 30, 1998 and repurchase agreements used $4.1 million during the
same period.
Capital Resources
Office of Thrift Supervision (OTS) regulations require savings institutions
to maintain certain minimum levels of regulatory capital. An institution
that fails to comply with its regulatory capital requirements must obtain
OTS approval of a capital plan and can be subject to a capital directive and
certain restrictions on its operations. At September 30, 1998, the minimum
regulatory capital regulations require institutions to have tangible capital
to total tangible assets of 1.5%; a minimum leverage ratio of core (Tier 1)
capital to total adjusted tangible assets of 3.0%; and a minimum ratio of
total capital (core capital and supplementary capital) to risk weighted
assets of 8.0%, of which 4.0% must be core capital.
Under the prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on an institution's financial statements. The
regulations establish a framework for the classification of savings
institutions into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Generally, an institution is considered well capitalized
if it has a core (Tier 1) capital ratio of at least 5.0% (based on average
total assets); a core (Tier 1) risk-based capital ratio of at least 6.0%;
and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors.
At September 30, 1998, the Bank meets all capital adequacy requirements to
which it is subject. Further, the most recent OTS notification categorized
the Bank as a well-capitalized institution under the prompt corrective
action regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
The following is a reconciliation of the Bank's GAAP and Regulatory capital,
and a summary of the Bank's actual capital ratios compared with the OTS
minimum bank capital adequacy requirements and their requirements for
classification as well capitalized at September 30, 1998:
Tier-1 Tier-1 Total
Equity Tangible Core Risk-Based Risk-Based
(dollars in thousands) Capital Equity Capital Capital Capital
------- -------- ------- ---------- ----------
GAAP Capital $ 54,007 $ 54,007 $ 54,007 $ 54,007 $ 54,007
Unrealized appreciation or gain on
securities available for sale, net (315) (315) (315) (315)
General loan valuation allowances - - - 2,218
Other, net (83) (83) (83) (2,290)
--------------------------------------------------
Regulatory capital 53,609 53,609 53,609 53,620
Total assets 632,245
Adjusted total assets 632,090 632,090
Risk-weighted assets 397,590 397,590
----------------------------------------------------------------
Actual capital ratio 8.54% 8.48% 8.48% 13.48% 13.49%
Minimum capital adequacy requirements 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal to or
greater than 5.00% 6.00% 10.00%
----------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in information about market risk that was
provided in the 1998 Annual Report to Shareholders, which was incorporated
by reference into the Company's 1998 Annual Report on Form 10-K.
PART II: OTHER INFORMATION
FFY FINANCIAL CORP.
SEPTEMBER 30, 1998
Item 1. Legal Proceedings
FFY or FFY Holdings, Inc. is not a party to any material legal proceeding
before any court or regulatory authority, administrative agency or other
tribunal. Further, FFY or FFY Holdings, Inc. is not aware of the threat of
any such proceeding.
As part of its ordinary course of business, First Federal is a party to
several lawsuits involving a variety of claims, including the collection of
delinquent accounts. No litigation is pending or, to First Federal's
knowledge, threatened in which the Bank faces potential loss or exposure
which would have a material impact on its financial condition or results of
operations. First Federal is not involved in any administrative or judicial
proceeding under any Federal, State or Local provisions which have been
enacted or adopted relating to the protection of the environment.
Item 2. Changes in Securities
None to be reported.
Item 3. Defaults on Senior Securities
None to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
On October 21, 1998, FFY Financial Corp. held its annual meeting of
stockholders. The matters approved by stockholders at the annual meeting
and the number of votes cast for, against or withheld (as well as the number
of abstentions and broker non-votes) as to each matter are set forth below.
Election of Directors for a three-year term:
BROKER
NAME FOR WITHHELD NON-VOTES
---- --- -------- ---------
A. Gary Bitonte, MD 3,187,154 27,058 -0-
Randy L. Shaffer 3,200,752 13,460 -0-
William A. Russell 3,183,904 30,308 -0-
Robert L. Wagmiller 3,173,796 40,416 -0-
Ratification of the Appointment of Auditors for a one-year term:
BROKER
NAME FOR AGAINST ABSTAIN NON-VOTES
---- --- ------- ------- ---------
KPMG Peat Marwick LLP 3,192,098 13,755 6,076 2,283
Item 5. Other Information
None to be reported.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits - Exhibit 27 - Financial Data Schedule.
B. Reports on Form 8-K - On August 6, 1998, the Registrant announced
earnings of $7.7 million, or $1.98 per diluted share for the year ended
June 30, 1998 and approval of the regular quarterly dividend of $.20 per
share.
Pursuant the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FFY Financial Corp.
Date: November 16, 1998 By: /s/ Jeffrey L. Francis
Jeffrey L. Francis
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 16, 1998 By: /s/ Therese Ann Liutkus
Therese Ann Liutkus
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)