UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 JANUARY 29, 1999
----- --------------------------------------
common stock, $.01 par value 3,854,217
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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1998 June 30,
(unaudited) 1998
---------------------------
Assets
Cash $ 4,684,731 $ 4,362,127
Interest-bearing deposits 8,095,456 5,713,055
Short-term investments 510,000
----------------------------
TOTAL CASH AND CASH EQUIVALENTS 13,290,187 10,075,182
Securities available for sale 170,160,039 140,793,201
Loans receivable 469,065,715 482,463,396
Loans available for sale 849,155 -
Interest and dividends receivable on securities 1,740,798 1,421,574
Interest receivable on loans 2,640,853 2,698,117
Federal Home Loan Bank stock, at cost 4,676,600 4,511,500
Office properties and equipment, net 7,580,998 7,920,660
Other assets 2,750,201 1,862,863
----------------------------
TOTAL ASSETS $672,754,546 $651,746,493
================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $456,664,889 $444,017,422
Securities sold under agreements to repurchase:
Short-term 9,477,507 13,088,323
Long-term 51,300,000 51,300,000
Borrowed funds:
Short-term 29,500,000 33,985,000
Long-term 35,000,000 -
Advance payments by borrowers for taxes and insurance 2,533,356 2,621,514
Other payables and accrued expenses 5,879,676 22,518,533
----------------------------
TOTAL LIABILITIES 590,355,428 567,530,792
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 3,871,666 shares at December 31, 1998
and 4,010,990 shares at June 30, 1998 66,300 66,300
Additional paid-in capital 65,270,519 65,118,141
Retained earnings, substantially restricted 81,790,914 79,428,438
Treasury stock, at cost, 2,758,334 shares at
December 31, 1998 and 2,619,010 shares at June 30, 1998 (62,756,780) (57,893,563)
Accumulated other comprehensive income 1,149,997 812,737
Common stock purchased by:
Employee Stock Ownership and 401(k) Plan (2,840,042) (3,034,562)
Recognition and Retention Plans (281,790) (281,790)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 82,399,118 84,215,701
-----------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $672,754,546 $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 Six months ended
December 31, December 31,
1998 1997 1998 1997
--------------------------------------------------------
Interest Income
Loans $ 9,886,874 $ 9,924,236 $19,856,770 $19,830,847
Securities available for sale 2,370,696 1,961,963 4,439,992 3,814,653
Federal Home Loan Bank stock 82,513 77,564 166,440 153,737
Other interest-earning assets 44,151 40,612 82,298 163,675
--------------------------------------------------------
TOTAL INTEREST INCOME 12,384,234 12,004,375 24,545,500 23,962,912
Interest Expense
Deposits 5,097,583 5,377,050 10,311,174 10,880,280
Securities sold under agreements to repurchase:
Short-term 115,921 209,129 263,476 426,184
Long-term 749,623 389,722 1,499,247 779,444
Borrowed funds:
Short-term 427,919 374,908 874,870 739,977
Long-term 350,741 - 504,283 -
--------------------------------------------------------
TOTAL INTEREST EXPENSE 6,741,787 6,350,809 13,453,050 12,825,885
NET INTEREST INCOME 5,642,447 5,653,566 11,092,450 11,137,027
Provision for loan losses 124,546 183,861 249,963 326,256
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,517,901 5,469,705 10,842,487 10,810,771
Non-Interest Income
Service charges 218,300 182,500 416,502 352,386
Gain (loss) on sale of securities available for sale (6,542) 51,350 57,713 99,589
Gain on sale of loans 277,379 2,340 388,832 2,340
Other 193,409 142,622 437,183 252,222
TOTAL NON-INTEREST INCOME 682,546 378,812 1,300,230 706,537
Non-Interest Expense
Salaries and employee benefits 1,603,698 1,504,136 3,184,256 2,920,600
Net occupancy and equipment 498,293 438,080 998,734 857,688
Insurance and bonding 119,655 124,553 244,074 245,806
State and local taxes 260,374 275,848 508,998 551,707
Other 655,748 577,919 1,328,644 1,105,446
TOTAL NON-INTEREST EXPENSE 3,137,768 2,920,536 6,264,706 5,681,247
INCOME BEFORE INCOME TAXES 3,062,679 2,927,981 5,878,011 5,836,061
Income Tax Expense
Federal 1,007,000 988,000 1,919,000 1,993,000
State 22,440 - 41,232 -
NET INCOME $ 2,033,239 $ 1,939,981 $ 3,917,779 $ 3,843,061
========================================================
BASIC EARNINGS PER SHARE $ 0.28 $ 0.26 $ 0.54 $ 0.51
========================================================
DILUTED EARNINGS PER SHARE $ 0.27 $ 0.25 $ 0.52 $ 0.49
========================================================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Six months ended
December 31,
1998 1997
--------------------------
Balance at July 1, $84,215,701 $82,174,216
Net income 3,917,779 3,843,061
Dividends paid, $.425 and $.375 per share, respectively (1,555,303) (1,414,442)
Treasury stock purchased (5,565,120) (2,643,673)
Stock options exercised 313,710 148,490
Amortization of KSOP expense 194,520 203,400
Tax benefit related to exercise of stock options 124,027 40,890
Difference between average fair value per share and cost
per share on KSOP shares committed to be released 416,544 375,548
Change in unrealized holding gain on securities
available for sale, net 337,260 844,771
--------------------------
Balance at December 31, $82,399,118 $83,572,261
==========================
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
December 31,
1998 1997
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,015,137 $ 4,810,113
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available for sale 7,697,077 6,577,605
Proceeds from sales of securities available for sale 17,149,709 17,732,116
Purchase of securities available for sale (88,372,119) (45,410,571)
Principal receipts on securities available for sale 17,484,726 9,004,785
Net (increase) decrease in loans 13,547,512 (2,024,023)
Purchase of office properties and equipment (214,144) (420,225)
Other, net (72,748) (350,740)
--------------------------
NET CASH USED IN INVESTING ACTIVITIES (32,779,987) (14,891,053)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 12,725,184 3,707,499
Net increase (decrease) in short-term
securities sold under agreements to repurchase (3,610,816) 5,736,118
Net increase (decrease) in short-term borrowed funds (4,485,000) 4,545,000
Proceeds from long-term borrowed funds 35,000,000 -
Decrease in amounts due to bank (616,012) (745,873)
Treasury stock purchases (5,565,120) (2,643,673)
Dividends paid (1,555,303) (1,414,442)
Proceeds from stock options exercised 313,710 148,490
Other, net (226,788) (377,092)
---------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,979,855 8,956,027
---------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,215,005 (1,124,913)
CASH AND CASH EQUIVALENTS
Beginning of period 10,075,182 10,007,755
---------------------------
End of period $13,290,187 $ 8,882,842
===========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments of interest expense $13,292,603 $12,809,208
Cash payments of income taxes 1,935,000 2,115,000
Loans originated for sale 16,087,760 60,175
Proceeds from sales of loans originated for sale 15,348,810 60,175
See accompanying notes to consolidated financial statements
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FFY FINANCIAL CORP. AND SUBSIDIARIES
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 Six months ended
December 31, December 31,
------------------------ ------------------------
1998 1997 1998 1997
----------------------------------------------------
Basic earnings per share computation:
Numerator - Net income $2,033,239 $1,939,981 $3,917,779 $3,843,061
Denominator - Weighted average common
shares outstanding (1) 7,258,664 7,543,514 7,307,074 7,554,096
Basic earnings per share $ 0.28 $ 0.26 $ 0.54 $ 0.51
====================================================
Diluted earnings per share computation:
Numerator - Net income $2,033,239 $1,939,981 $3,917,779 $3,843,061
Denominator - Weighted average common
shares outstanding (1) 7,258,664 7,543,514 7,307,074 7,554,096
Dilutive effect of stock options (1) 234,192 281,934 241,334 277,126
----------------------------------------------------
Weighted average common shares
and common stock equivalents (1) 7,492,856 7,825,448 7,548,408 7,831,222
Diluted earnings per share $ 0.27 $ 0.25 $ 0.52 $ 0.49
====================================================
<F1> Weighted average common and common equivalent shares have been
restated in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128 - Earnings per Share, to reflect a 100% stock
dividend declared on January 19, 1999.
(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 the 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. Other
comprehensive income (loss) for the three month periods ended December
31, 1998 and 1997 was ($255,536) and $178,503, respectively, and for
the six month periods ended December 31, 1998 and 1997 was $337,260
and $844,771, respectively.
In June 1997, the Financial Accounting Standards Board (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 established
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. Currently, this statement
does not affect the Company.
PART I: FINANCIAL INFORMATION
FFY FINANCIAL CORP.
DECEMBER 31, 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 and six months ended December 31,
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 could 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, although no assurance can be given in this regard.
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 compliance 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 of the readiness of its
financial computer system and significant vendors' 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 $755,000, including
$429,000 for the new comprehensive software system, in connection with the
Year 2000 readiness project. Management estimated the total cost of Year
2000 compliance issues would 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 finalizing a written contingency plan and expects
it to be substantially complete by February 28, 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 currently has contingency plans to replace significant
vendors that may have Year 2000 difficulties in addition to replacing the
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 December 31, 1998 were $672.7 million compared to
$651.7 million at June 30, 1998, an increase of $21.0 million, or 3.2%. The
increase was primarily attributable to increases in securities available for
sale partially offset by a decline in loans receivable. Total liabilities
at December 31, 1998 were $590.3 million compared to $567.5 million at June
30, 1998, an increase of $22.8 million, or 4.0%. The increase was primarily
attributable to increases in deposits and long-term borrowings, partially
offset by declines in short-term securities sold under agreements to
repurchase (repurchase agreements), short-term borrowings and other payables
and accrued expenses.
Securities. The Company's securities portfolio increased $29.4 million, or
20.9%, during the first six months of fiscal year 1999, and totaled $170.2
million at December 31, 1998 compared to $140.8 million at June 30, 1998.
The increase over the six month period primarily consisted of security
purchases totaling $71.8 million partially offset by $17.4 million, $7.7
million and $17.5 million in sales, maturities and principal receipts on
mortgage-backed securities, respectively. The increase in securities was
primarily funded by increased borrowings. At December 31, 1998, the
securities portfolio consisted of 46.4% in mortgage-backed securities, 19.5%
in federal agency obligations, 17.9% in municipal securities, 14.3% in trust
preferred securities and 1.9% in equity securities.
Loans. Net loans receivable, including loans available for sale, declined
$12.6 million, or 2.6%, and totaled $469.9 million at December 31, 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 continued to grow within the Bank's loan portfolio.
At December 31, 1998 and September 30, 1998, adjustable-rate loans totaled
37.8% and 35.8%, respectively, 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 71.9% of the gross loan portfolio at December 31, 1998 compared
to 71.7% of the gross loan portfolio at June 30, 1998.
Loan originations during the first six months of fiscal year 1999 totaled
$83.4 million compared to $55.0 million during the first six months of
fiscal year 1998. The increase in loan originations is largely attributable
to the Bank's secondary market operation which accounted for $16.1 of
current year originations. 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 six
months ended December 31, 1998, one-to-four family loan originations,
including the construction of one-to-four family homes were $47.3 million,
or 56.7% of total originations; multi-family residential, commercial real
estate and development loan originations were $12.3 million, or 14.8% of
total originations; and consumer loan originations were $23.8 million, or
28.5% of total originations.
The Bank's secondary market mortgage lending operation, which began in
December 1997, 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 195
loans during the first six months of the current year, resulting in a pre-
tax gain of $389,000. Management anticipates increased activity in
secondary market mortgage lending as long as market conditions allow it to
be profitable.
Deposits. Deposits increased $12.7 million, or 2.8%, during the first six
months of fiscal year 1999 and totaled $456.7 million at December 31, 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
higher-yield short-term certificates of deposit. The Bank's 10-month
certificate of deposit special with an annual percentage yield of 5.10%
accumulated a balance of $33.1 million through December 31, 1998. Overall,
certificate accounts increased $7.2 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 December 31, 1998, this new money market product had a
balance of $15.9 million compared to a balance of $11.5 million at June 30,
1998. Overall, money market accounts increased $3.6 million since June 30,
1998. NOW accounts grew $3.9 million, whereas passbook accounts declined
$2.0 million during the first six months of fiscal year 1999. The weighted
average cost of deposits was 4.45% and 4.63% at December 31, 1998 and June
30, 1998, respectively.
Repurchase Agreements. Short-term repurchase agreements declined $3.6
million during the first six months of fiscal year 1999 and totaled $9.5
million at December 31, 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 $30.5 million during the first six
months of fiscal year 1999 and totaled $64.5 million at December 31, 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. 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 $16.6
million during the first six months of fiscal year 1999, primarily funded by
customers' short-term loan repayments (see "Loans" above) in July 1998, and
totaled $5.9 million at December 31, 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.
Stockholders' Equity. Total stockholders' equity declined $1.8 million
during the first six months of fiscal year 1999 and totaled $82.4 million at
December 31, 1998 compared to $84.2 million at June 30, 1998. This decline
resulted principally from stock repurchases and dividends paid to
shareholders totaling $5.6 million and $1.6 million, respectively, partially
offset by net income for the six months ended December 31, 1998 of $3.9
million, increased holding gains on available-for-sale securities of
$337,000 and other increases of $1.1 million 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 then
outstanding common stock in open market transactions over a twelve month
period beginning October 13, 1998. As of January 19, 1999, 107,575 shares
had been repurchased at an average price of $31.52 per share.
Results of Operations
Comparison of the Three and Six Months Ended December 31, 1998 and 1997
General. The Company recorded net income of $2.0 million, or $0.27 per
diluted share for the three months ended December 31, 1998 compared to net
income of $1.9 million, or $0.25 per diluted share for the same three month
period last year. For the six months ended December 31, 1998, the Company
recorded net income of $3.9 million, or $0.52 per diluted share compared to
$3.8 million, or $0.49 per diluted share for the six months ended December
31, 1997. Refer to Note 1(c) of the Notes to Consolidated Financial
Statements and Item 5 - Other Information contained in this report regarding
earnings per share. The Company's annualized return on average assets and
return on average equity for the three months ended December 31, 1998 were
1.22% and 9.82%, respectively, compared to 1.27% and 9.30% for the three
months ended December 31, 1997. The Company's annualized return on average
assets and return on average equity for the six months ended December 31,
1998 were 1.19% and 9.46%, respectively, compared to 1.26% and 9.27% for the
six months ended December 31, 1997.
Interest Income. Interest income totaled $12.4 million for the three months
ended December 31, 1998 compared to $12.0 million for the three months ended
December 31, 1997, representing an increase of $380,000, or 3.2%. For the
six months ended December 31, 1998, interest income totaled $24.5 million
compared to $24.0 million for the six months ended December 31, 1997, an
increase of $583,000, or 2.4%. The increase in interest income for the
current three and six month periods over the same periods last year was
primarily volume increases in securities and loans, partially offset by
yield declines in securities and loans. A volume decline in other interest-
earning assets, primarily overnight deposits, also partially offset the
increase in interest income for the six months ended December 31, 1998. The
average balance of total interest-earning assets for the three months ended
December 31, 1998 and 1997 was $647.3 million and $590.1 million,
respectively, and for the six months ended December 31, 1998 and 1997 was
$636.7 million and $590.3 million, respectively. The current year increases
in average interest-earning assets over the prior year primarily reflect
continued loan growth and increases in Federal agency obligations, tax-
exempt securities and trust preferred securities, which was primarily funded
with increases in repurchase agreements and borrowings. The weighted
average yield on total interest-earning assets for the three months ended
December 31, 1998 and 1997 was 7.78% and 8.22%, respectively, and for the
six months ended December 31, 1998 and 1997 was 7.83% and 8.18%,
respectively. The current year declines in yield primarily reflects
decreased yields on securities and loans which 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 December 31, 1998 compared to $6.3 million for the three months
ended December 31, 1997, representing an increase of $391,000, or 6.2%. For
the six months ended December 31, 1998, interest expense totaled $13.4
million compared to $12.8 million for the six months ended December 31,
1997, an increase of $627,000, or 4.9%. The increase in interest expense
for the current three and six month periods over the same periods 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 short-term repurchase
agreements as well as rate declines in long-term repurchase agreements and
short-term borrowed funds. The average balance of total interest-bearing
liabilities for the three months ended December 31, 1998 and 1997 was $565.2
million and $515.3 million, respectively, and for the six months ended
December 31, 1998 and 1997 was $557.4 million and $517.4 million,
respectively. The current year growth in average interest-bearing
liabilities over the prior year was used to fund the growth in interest-
earning assets mentioned above. The weighted average rate on total
interest-bearing liabilities for the three months ended December 31, 1998
and 1997 was 4.77% and 4.93%, respectively, and for the six months ended
December 31, 1998 and 1997 was 4.83% and 4.96%, respectively, primarily due
to a reduction in market rates.
Net Interest Income. Net interest income totaled $5.6 million for the three
months ended December 31, 1998, a decline of $11,000, or 0.2%, compared to
the three months ended December 31, 1997. The Company's net interest margin
(net interest income as a percentage of average interest-earning assets) was
3.60% for the three months ended December 31, 1998, down 30 basis points
from 3.90% for the three months ended December 31, 1997. Net interest
income totaled $11.1 million for the six months ended December 31, 1998, a
decline of $45,000, or 0.4%, compared to the six months ended December 31,
1997. The Company's net interest margin was 3.59% for the six months ended
December 31, 1998, down 24 basis points from 3.83% for the six months ended
December 31, 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
and $250,000 for the three and six months ended December 31, 1998,
respectively, compared to $184,000 and $326,000 for the same periods last
year . These declines 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 Bank's allowance for loan losses at December
31, 1998 totaled 74.1% 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 December 31, 1998.
Non-Interest Income. Non-interest income totaled $683,000 for the three
months ended December 31, 1998, an increase of $304,000 compared to the
same prior year period. For the six months ended December 31, 1998, non-
interest income totaled $1.3 million, an increase of $594,000 compared to
the same prior year period. First Federal's secondary market mortgage
operation, which began in December 1997, largely contributed to the current
year increases accounting for gains on loan sales of $277,000 and $389,000
for the three and six months ended December 31, 1998, respectively. Also
contributing to the growth in non-interest income was the activities of FFY
Holdings, Inc., which include real estate brokerage services and insurance
sales through its two respective affiliations, and increased fee income on
loans and deposits.
Non-Interest Expense. Non-interest expense totaled $3.1 million for the
three months ended December 31, 1998, an increase of $217,000 compared to
the same prior year period. For the six months ended December 31, 1998,
non-interest expense totaled $6.3 million, an increase of $583,000 compared
to the same prior year period. Expenses related to the activities of FFY
Holding's real estate and insurance affiliates largely contributed to this
six-month increase, namely salaries, occupancy and advertising which totaled
approximately $269,000. Additionally, severance pay was awarded to a long-
tenured company officer in December 1998 as a result of her retirement.
Partially offsetting the aforementioned increases was a decline in
professional fees for both the three and six months ended December 31, 1998
compared to their respective prior year periods. 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 49.5% and 50.8% for the three and six months ended
December 31, 1998 compared to 48.8% and 48.4%for the three and six months
ended December 31, 1997.
Income Taxes. Federal income taxes totaled $1.0 million for the three
months ended December 31, 1998 compared to $988,000 for the same period last
year. For the six months ended December 31, 1998, federal income tax
expense totaled $1.9 million compared to $2.0 million for the same period
last year. The decline in federal income taxes comparing the six months
ended December 31, 1998 and 1997 was due a decline in the Company's
effective tax rate, which was 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 exceeded the applicable liquidity
requirement at December 31, 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 $13.5 million whereas the growth in the securities portfolio used
$46.0 million during the six months ended December 31, 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
$12.7 million and $30.5 million, respectively, during the six months ended
December 31, 1998 and repurchase agreements used $3.6 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 December 31, 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 December 31, 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 December 31, 1998:
Tier-1 Tier-1 Total
Equity Tangible Core Risk-Based Risk-Based
(dollars in thousands) Capital Equity Capital Capital Capital
- -----------------------------------------------------------------------------------------------------------
GAAP Capital $ 54,322 $ 54,322 $ 54,322 $ 54,322 $ 54,322
Unrealized appreciation or gain on
securities available for sale, net (242) (242) (242) (242)
General loan valuation allowances - - - 2,303
Other, net (191) (191) (191) (1,645)
-----------------------------------------------
Regulatory capital 53,889 53,889 53,889 54,738
Total assets 649,079
Adjusted total assets 648,704 648,704
Risk-weighted assets 403,986 403,986
-----------------------------------------------------------
Actual capital ratio 8.37% 8.31% 8.31% 13.34% 13.55%
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.
DECEMBER 31, 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 LLP 3,192,098 13,755 6,076 2,283
Item 5. Other Information
On January 15, 1999, FFY announced the formation of a new real estate
affiliate combining the operations of its existing real estate affiliate,
First Real Estate, Ltd. with Coldwell Banker United Group Realtors to form
Coldwell Banker FFY Real Estate. Operations are expected to begin in
February 1999. This new affiliate will be 1/3 owned by FFY Holdings, Inc.
On January 19, 1999, FFY announced the declaration of a 100% stock dividend,
which is equivalent to a two-for-one stock split, to be paid on March 5,
1999 to shareholders of record on February 19, 1999. Earnings per share
data in this report has been restated for this stock dividend as per SFAS
No. 128 - Earnings per Share.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits - Exhibit 27 - Financial Data Schedule.
B. Reports on Form 8-K - On October 20, 1998, the Registrant announced
earnings of $1.9 million, or $0.50 per diluted share for the quarter
ended September 30, 1998 and an increase in the regular quarterly
dividend from $0.20 per share to $0.225 per share.
Pursuant the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FFY Financial Corp.
Date: February 12, 1999 By: /s/ Jeffrey L. Francis
----------------------------
Jeffrey L. Francis
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 1999 By: /s/ Therese Ann Liutkus
----------------------------
Therese Ann Liutkus
Treasurer and Chief Financial Officer
(Principal Financial and
Accounting Officer)