Exhibit 13
(FFY Logo) FFY Financial Corp.
1999 ANNUAL REPORT
Contents
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Financial Highlights 1
President's Letter 2
Selected Consolidated Financial Information 4
Management's Discussion & Analysis 6
Financial Statements 20
Officers & Directors 43
Stockholder Information 44
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Photo of
Board of Directors
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Meet the board of directors of your company who are also introduced
individually throughout this annual report.
In July 1999, the board moved to unite the affiliates of FFY Financial
Corp. under the FFY name. The Company announced that First Federal Savings
Bank of Youngstown will become FFY Bank and Daniel W. Landers Insurance
will become FFY Insurance. Coldwell Banker FFY Real Estate already carries
the FFY name. This common brand name, together with a new logo, will
enhance the recognition of our entities as one.
If you would like additional information regarding any of the FFY
companies, please use the convenient business reply card included within
this annual report.
1999 Financial Highlights
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FFY Financial Corp. and Subsidiaries
(Dollars in Thousands Except Per Share Data)
For the year 1999 1998 Change
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Net interest income $22,569 22,447 0.54%
Non-interest income 2,550 1,765 44.48%
Net income 8,140 7,729 5.32%
Dividends on common stock 3,102 2,901 6.93%
Average shares outstanding - basic 7,073 7,516 -5.89%
Average shares outstanding - diluted 7,307 7,794 -6.25%
Per common share (1)
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Basic earnings per share $ 1.15 1.03 11.65%
Diluted earnings per share 1.11 0.99 12.12%
Cash dividends declared per share 0.45 0.40 12.50%
Tangible book value per share 9.81 10.49 -6.48%
Market price at year end 19.00 16.25 16.92%
At year end
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Total assets $675,691 651,746 3.67%
Loans receivable, net 453,839 482,463 -5.93%
Securities available for sale 190,326 140,793 35.18%
Deposits 457,343 444,017 3.00%
Securities sold under agreements to repurchase 57,918 64,388 -10.05%
Borrowed funds 82,800 33,985 143.64%
Stockholders' equity 70,117 84,216 -16.74%
Average for the year
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Total assets $663,251 618,664 7.21%
Loans receivable, net 465,622 463,118 0.54%
Securities available for sale 167,217 124,764 34.03%
Deposits 447,525 450,768 -0.72%
Securities sold under agreements to repurchase 60,354 49,482 21.97%
Borrowed funds 57,771 24,004 140.67%
Stockholders' equity 79,310 83,315 -4.81%
Financial ratios
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Return on average assets 1.23% 1.25% -1.60%
Return on average equity 10.26% 9.28% 10.56%
Efficiency ratio 49.84% 49.08% 1.55%
Operating expense to average assets 1.88% 1.90% -1.05%
Allowance for loan losses to nonperforming assets 112.27% 82.43% 36.20%
<FN>
<F1> On January 19, 1999, the Company announced a 100% stock dividend, which
is equivalent to a two-for-one stock split, that was paid on March 5,
1999 to stockholders of record on February 19, 1999. Accordingly, all
share and per share data have been restated as a result of the stock
dividend.
</FN>
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Photo of
President and CEO
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To Our Shareholders
I'm pleased to report that fiscal 1999 was another year of progress
in making your company a better and more competitive organization. Focused
on our commitment to shareholder value, we advanced our affiliate presence
and broadened our traditional product line while improving net income,
earnings per share and return on equity. As I've said previously, we
operate in a very competitive market, and 1999 proved no less competitive
than previous years.
In order to meet this increased competition, over the past year we
increased our loan origination team and their support staff. This increase
in sales and production capacity is a critical element in continuing the
growth in earnings per share and return on equity seen over the past two
years. Our lending staff is fully competent in originating home loans for
our portfolio as well as for sale in the secondary market, providing a
significant competitive advantage over most home lenders in our market. We
also streamlined the process for standard home loan requests to less than
ten days from application to closing. Improvements were also made in our
commercial real estate lending area. While we have originated commercial
real estate mortgages for more than twenty-five years, during 1999 our
ability to compete in this area was enhanced by the addition of an
experienced commercial lender to specialize in the origination of
commercial mortgage loans.
In February 1999, David B. Roberts Real Estate, our real estate
brokerage affiliate, merged with Coldwell Banker United Group to form
Coldwell Banker FFY Real Estate. With nearly 100 sales agents, this entity
holds the number one market position in our home county. The new FFY
Professional Centre became the home base for the growing real estate
venture, affording expansion space for a commercial real estate arm, a loan
originator from our bank, and our insurance affiliate.
Our insurance affiliate, Daniel W. Landers Insurance, completed its
first full year of operation this past April. I'm pleased to report that
this business is proceeding as planned and I look forward to continued
improving performance from both new business and renewing contracts as
well.
In a desire to bring all of our entities, including the bank, under
one umbrella, the board of directors and management made the decision to
change the name of the affiliates to FFY Bank, FFY Insurance and Coldwell
Banker FFY Real Estate. The changeover will be completed by October 1,
1999. With a common brand name and a new recognizable logo, we anticipate
the general public and our customers will come to associate the same high
standards of service from all of our affiliates.
We continue to show improvements in financial performance. Diluted
earnings per share increased 12.1% from $0.99 in fiscal 1998 to $1.11 in
fiscal 1999. Return on equity for this past year was 10.3%, up from 9.3%
in fiscal 1998. These key measures of performance are a major
consideration for decisions by your board of directors and management.
With all the media coverage, it is incumbent on me to comment on our
Year 2000 readiness. Our major conversion of all customer accounting
systems in April 1998 set the stage for our readiness effort. Since then,
virtually all personal computers have been replaced, our networks have been
upgraded and all systems have been diligently tested and contingency plans
have been developed for mission critical applications. In short, we're
prepared for Y2K.
Lastly, I would like to formally thank the staff of the bank and our
affiliates for their contributions to our improved performance this past
year. They worked hard and smart and the results were evident. Our
shareholders should be assured that they can expect the same diligence in
the future.
Sincerely,
/s/ Jeffrey L. Francis
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Jeffrey L. Francis
President and CEO
Selected Consolidated Financial Information
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FFY Financial Corp. and Subsidiaries
(Dollars in Thousands Except Per Share Data)
June 30,
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Selected Consolidated Financial Condition Data: 1999 1998 1997 1996 1995
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Total assets $675,691 651,746 599,249 575,602 576,619
Loans receivable, net 453,839 482,463 460,712 438,790 401,664
Loans available for sale 442 - - - -
Allowance for loan losses 2,645 2,740 2,962 3,439 3,159
Non-performing assets 2,356 3,324 3,993 4,673 4,352
Securities available for sale 190,326 140,793 112,036 109,836 132,341
Securities held to maturity - - - - 11,819
Deposits 457,343 444,017 450,224 456,541 461,979
Short-term repurchase agreements (1) 6,618 13,088 7,307 6,640 -
Long-term repurchase agreements (1) 51,300 51,300 25,000 - -
Short-term borrowed funds 22,800 33,985 27,455 1,200 -
Long-term borrowed funds 60,000 - - - -
Stockholders' equity 70,117 84,216 82,174 101,921 106,400
Years ended June 30,
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Selected Consolidated Operations Data: 1999 1998 1997 1996 1995
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Total interest income $ 49,084 48,006 45,925 43,716 42,444
Total interest expense 26,515 25,559 23,823 22,133 19,730
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Net interest income 22,569 22,447 22,102 21,583 22,714
Provision for loan losses 494 565 688 325 403
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Net interest income after provision for loan losses 22,075 21,882 21,414 21,258 22,311
Service charges 897 700 563 522 429
Gain (loss) on sale of securities 203 247 (320) 30 (17)
Gain on sale of loans 720 134 - - -
Other non-interest income 730 684 375 548 428
Total non-interest expense (12,495) (11,771) (14,288) (11,991) (11,789)
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Income before income taxes and minority interest 12,130 11,876 7,744 10,367 11,362
Income tax expense 4,083 4,147 2,420 3,465 3,872
Minority interest in loss of consolidated subsidiaries (93) - - - -
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Net income $ 8,140 7,729 5,324 6,902 7,490
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Basic earnings per share (2) $ 1.15 1.03 0.62 0.71 0.69
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Diluted earnings per share (2) $ 1.11 0.99 0.60 0.68 0.67
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Cash dividends declared per share (2) $ 0.45 0.40 0.35 0.30 0.25
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<FN>
<F1> Securities sold under agreements to repurchase.
<F2> Per share figures were restated for years prior to 1999 to reflect a
100% stock dividend, effected in the form of a two-for-one stock split,
declared on January 19, 1999.
</FN>
At or for the years ended June 30,
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Selected Financial Ratios and Other Data: 1999 1998 1997 1996 1995
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Performance Ratios:
Return on average assets (1) 1.23% 1.25% 0.90% 1.20% 1.31%
Return on average equity (2) 10.26% 9.28% 5.73% 6.58% 6.87%
Interest rate spread information:
Average during the period (3) 3.08% 3.19% 3.16% 3.04% 3.28%
End of period (3) 2.99% 2.94% 3.06% 2.95% 2.66%
Net interest margin (3) (4) 3.62% 3.81% 3.89% 3.89% 4.09%
Operating expense to average assets 1.88% 1.90% 2.42% 2.09% 2.06%
Efficiency ratio (5) 49.84% 49.08% 62.01% 52.93% 49.60%
Dividend payout ratio (6) 40.54% 40.40% 58.82% 43.80% 37.59%
Performance Ratios Excluding Affiliates (7):
Return on average assets (1) 1.24% 1.27% 0.90% 1.20% 1.31%
Return on average equity (2) 10.35% 9.41% 5.73% 6.58% 6.87%
Operating expense to average assets 1.82% 1.84% 2.42% 2.09% 2.06%
Efficiency ratio (5) 48.80% 47.92% 62.01% 52.93% 49.60%
Quality Ratios:
Non-performing assets to total assets 0.35% 0.51% 0.67% 0.81% 0.75%
Allowance for loan losses to non-performing
assets 112.27% 82.43% 74.18% 73.59% 72.59%
Allowance for loan losses to gross loans
outstanding 0.58% 0.56% 0.64% 0.77% 0.77%
Capital Ratios:
Equity to total assets at end of period 10.38% 12.92% 13.71% 17.71% 18.45%
Average equity to average assets 11.96% 13.47% 15.71% 18.29% 19.06%
Book value per share (8) $ 9.85 10.50 9.91 10.03 9.80
Tangible book value per share (8) $ 9.81 10.49 9.91 10.03 9.80
Change in book value per share due to SFAS
No. 115 (8) $ (0.40) 0.10 0.01 (0.09) (0.03)
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.13 x 1.15 x 1.17 x 1.21 x 1.22 x
<FN>
<F1> Ratio of net income to average total assets.
<F2> Ratio of net income to average equity.
<F3> Ratio is presented on a fully taxable equivalent basis using the
Company's federal statutory tax rate of 34%.
<F4> Net interest income divided by average interest earning assets -
calculated without consideration of the unrealized gain (loss) on
securities available for sale.
<F5> Ratio is calculated without consideration to goodwill amortization and
gain (loss) on sale of securities.
<F6> Cash dividends per share divided by diluted earnings per share.
<F7> Ratios presented do not include the activity of the Company's real
estate and insurance affiliates which began operations in September
1997 and April 1998, respectively.
<F8> Per share figures were restated for years prior to 1999 to reflect a
100% stock dividend declared on January 19, 1999.
</FN>
{Logo}
Financial data for the years ended June 30
Return on Average Equity Operating Expense to
Average Assets
1995 6.87% 1995 2.06%
1996 6.58% 1996 2.09%
1997 5.73% 1997 2.42%
1998 9.28% 1998 1.90%
1999 10.26% 1999 1.88%
Diluted Earnings Per Share Cash Dividends Declared
Per Share
1995 $0.67 1995 $0.25
1996 $0.68 1996 $0.30
1997 $0.60 1997 $0.35
1998 $0.99 1998 $0.40
1999 $1.11 1999 $0.45
Notes: Certain 1997 data above would be positively affected without regard
to the one-time SAIF special assessment. Per share figures were
restated for years prior to 1999 to reflect a 100% stock dividend.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
FFY Financial Corp. (FFY or Company) is a unitary savings and loan holding
company incorporated under the laws of Delaware and is engaged in financial
services through its wholly-owned subsidiaries, First Federal Savings Bank
of Youngstown (First Federal or Bank) and FFY Holdings, Inc. First Federal
is a federally chartered savings bank and FFY Holdings, Inc. invests in
entities offering expanded financial services to its customers. In June
1993, First Federal converted from a federally chartered mutual savings bank
to a federally chartered stock savings bank. As part of the conversion, the
Company acquired all of the outstanding common stock of First Federal. FFY
Holdings, Inc., which was formed in August 1997, has a one-third interest in
Coldwell Banker FFY Real Estate and a two-thirds controlling interest in
Daniel W. Landers Insurance Agency, Ltd. Real estate services are offered
through the Company's affiliation with Coldwell Banker FFY Real Estate and
property and casualty insurance is offered through the Company's affiliation
with Daniel W. Landers Insurance Agency, Ltd. On July 12, 1999, the Company
announced that First Federal will officially become FFY Bank on October 1,
1999 and Daniel W. Landers Insurance Agency, Ltd. will become FFY Insurance.
Coldwell Banker FFY Real Estate already carries the FFY name. Expenditures
related to the name change are expected to be approximately $200,000 before
tax.
Management's discussion and analysis of financial condition and results of
operations is intended to facilitate the understanding and assessment of
changes in financial condition and results of operations of the Company. The
following information should be read in conjunction with the financial
statements and notes thereto.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project"
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties including
changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the factors
listed above could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in
any current statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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Photo of
FFY Professional Centre
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Coldwell Banker FFY Real Estate (formed February 1999 with the merger of
David B. Roberts Real Estate and Coldwell Banker United Group) moved into
the new FFY Professional Centre in order to house their expanding
operation.
Year 2000
The Company's business 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 (Y2K) readiness 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 three years, the Company has been addressing the Year 2000
issue. A significant part of Year 2000 readiness 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 new financial computer system has been tested for Year 2000
readiness and the results were successful. 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 ready and would hinder other program development. Another
significant part of the Company's Year 2000 readiness includes contacting
significant third party vendors who are required to provide evidence of
their efforts to become Year 2000 ready. Management has evaluated each of
the Company's significant vendor's Year 2000 readiness progress and
considers them to be satisfactory. Management plans to have ongoing
communications with such vendors to insure Year 2000 readiness. 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
continues to test such systems for Year 2000 readiness for further
assurance. Of all third-party vendors and suppliers, perhaps the most
difficult assessment of Year 2000 risks are the utility companies. This risk
is shared by everyone in any geographic area and cannot be accurately
quantified. The Company's contingency plan also addresses the loss of
electrical power and other environmental failures. The Company has and will
continue to inform customers and employees regarding Year 2000 readiness.
The Company's Year 2000 readiness project is substantially complete;
however, continued efforts such as testing, vendor contacts, customer and
employee awareness will continue throughout the Year 2000.
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Photo of
Y2K Team
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For the past three years, a group of employees has worked to assure that
First Federal Savings Bank of Youngstown is "Y2K OK".
The Company has incurred cash outlays of approximately $882,000 through June
30, 1999, 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 adversely 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. 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 has finalized a written contingency plan and members of the Y2K
Committee have been testing and will continue to test this plan until the
Year 2000. The plan was developed for a general failure of the Company's
internal systems and specific contingency plans have been 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 other vendors or suppliers the Company cannot
test. The Company's contingency plan includes procedures to return to
automated systems after Year 2000 problems, if any, are rectified.
The Company anticipates that higher liquidity needs could result as it
approaches the end of calendar year 1999 and during the early part of
calendar year 2000. The Company's primary goal with regard to liquidity and
cash contingencies related to Y2K is to have enough cash available to meet
customer cash requirements. This is essential to ensure the continuing
viability of First Federal as a financial institution in which our customers
have confidence. The risk of public perception that cash will not be
available is a primary concern and specific issues are related to the level
of anticipated customer withdrawals and the level of loan commitments that
will need to be funded as customers access previously undisbursed lines of
credit. Consequently, the Bank preliminarily intends to use the Federal
Reserve Bank and the Federal Home Loan Bank as sources for liquidity.
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 its 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.
Changes in Financial Condition
General. Total assets at June 30, 1999 were $675.7 million compared to
$651.7 million at June 30, 1998, an increase of $24.0 million, or 3.7%. The
increase was primarily growth in the securities portfolio partially offset
by a decline in loans receivable. Total liabilities at June 30, 1999 were
$605.6 million compared to $567.5 million at June 30, 1998, an increase of
$38.1 million, or 6.7%. This increase was primarily attributable to
increases in deposits and long-term borrowings, partially offset by declines
in short-term repurchase agreements, short-term borrowings and other
payables and accrued expenses. These aforementioned fluctuations in assets
and liabilities are described in greater detail below.
Securities Portfolio. The Company's securities portfolio increased $49.5
million, or 35.2%, during fiscal year 1999 and totaled $190.3 million at
June 30, 1999 compared to $140.8 million at June 30, 1998. Security
purchases totaling $128.2 million were partially offset by $35.5 million,
$10.7 million and $26.4 million in sales, maturities and principal receipts
on mortgage-backed securities. Additionally, the value of the securities
portfolio included a net unrealized gain of $1.2 million at June 30, 1998,
and, due to the recent rising interest rate environment, a net
unrealized loss of $4.3 million at June 30, 1999. Management believes that
the decline in fair value is temporary and that there is no impairment of
securities. Security purchases on the Company's Statement of Cash Flows
includes securities that were recorded on the trade date in June 1998, but
did not settle until July 1998. The increase in securities was primarily
funded by increased borrowings as part of management's strategy to maximize
net interest income.
Loan Portfolio. Net loans receivable declined $28.7 million, or 5.9%, and
totaled $453.8 million at June 30, 1999 compared to $482.5 million at June
30, 1998. The decline in the loan portfolio was primarily the result of two
factors. First, during the first quarter of fiscal 1999 there were
repayments of approximately $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. Second, fixed-rate loans
were sold in the secondary market as opposed to being retained in the Bank's
portfolio in the low interest rate environment that existed for a large part
of fiscal year 1999. Adjustable-rate loans, which the Bank does not
currently sell in the secondary market, continued to grow within the Bank's
loan portfolio. At June 30, 1999, adjustable-rate loans totaled 40.1% 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 on income and net
portfolio value was reflected in the increase in adjustable-rate loans,
primarily in the one- to four -family portfolio. Mortgage loans secured by
one- to four -family residences continued to be the largest component of the
loan portfolio, and represented 71.7 % of the gross loan portfolio at both
June 30, 1999 and 1998. During fiscal year 1999, the Bank began an effort to
increase the commercial loan portfolio to take advantage of the potential
higher rate of return on such a portfolio. Accordingly, the Bank's
commercial first mortgage loans grew from $28.6 million, or 5.8% of the
gross loan portfolio at June 30, 1998 to $33.7 million, or 7.2% of the gross
loan portfolio at June 30, 1999. The Bank anticipates continued growth in
commercial loans.
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Photo of
Myron S. Roh
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Chairman of the Board of FFY Financial Corp. and First Federal Savings Bank
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Photo of
Randy Shaffer
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Vice President of FFY Financial Corp. and First Federal Savings Bank
Portfolio loan originations during the year ended June 30, 1999 totaled
$118.9 million, a decrease of $20.0 million, compared to $138.9 million for
the year ended June 30, 1998. The decline in portfolio originations was due
to an increase in originations of loans available for sale during fiscal
year 1999 as well as fiscal year 1998 originations including the $17.1
million in short-term loans disbursed in June 1998 as explained in the
paragraph above. Originations of loans available for sale during the year
ended June 30, 1999 totaled $30.9 million, an increase of $25.9 million
compared to $5.0 million for the year ended June 30, 1998. Overall, total
loan originations increased $5.9 million during fiscal year 1999, which was
mostly attributable to the Bank's secondary market operation. 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 fiscal year 1999, one- to four -family loan
originations, including loans for the construction of one- to four -family
homes, were $85.7 million, or 57.2% of total originations, compared to $75.1
million, or 52.2% for fiscal year 1998. All mortgage loans originated by
First Federal during the year were underwritten by the Bank's personnel and
are secured primarily by properties in Mahoning, Trumbull or Columbiana
counties in northeastern Ohio.
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Photo of
W. Terry Patrick
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Partner
Friedman & Rummell Attorneys at Law
First Federal has historically been a portfolio lender; however, during
fiscal year 1998, management put in place a secondary market mortgage lending
operation designed to originate and sell qualifying loans to the Federal
National Mortgage Association (Fannie Mae). Currently, First Federal only
sells fixed-rate loans to Fannie Mae. During fiscal year 1999, First Federal
sold 390 loans with a principal balance of $31.0 million at a pre-tax gain
of $720,000. During fiscal year 1998, 66 loans were sold with a principal
balance of $5.0 million at a pre-tax gain of $134,000. Management believes
the activity in secondary market mortgage lending may slow in the near term
due to the recent increase in market interest rates. However, management
expects that the secondary market mortgage lending program will continue as
long as market conditions allow it to be profitable.
Deposits. Deposit accounts increased $13.3 million, or 3.0%, and totaled
$457.3 million at June 30, 1999 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 a local financial institution's initial public
offering. However, since June 1998, the Bank has been successful in
obtaining funds, primarily in retail money market accounts. In order to be
competitive in obtaining funds and to respond to changes in consumer demand,
First Federal 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 June 30, 1999, this new money market product totaled $25.0
million with a weighted average rate of 4.31%, compared to $11.5 million and
a weighted average rate of 4.27% at June 30, 1998. Overall, money market
accounts increased $11.4 million during fiscal year 1999. NOW and
certificate accounts grew $2.3 million and $198,000, respectively, during
fiscal year 1999, whereas passbook accounts declined $558,000. The weighted
average cost of deposits declined 36 basis points during fiscal year 1999,
from 4.63% at June 30, 1998 to 4.27% at June 30, 1999.
Securities Sold Under Agreements to Repurchase. Short-term securities sold
under agreements to repurchase (repurchase agreements) declined $6.5 million
during fiscal year 1999 and totaled $6.6 million at June 30, 1999 compared
to $13.1 million at June 30, 1998. The reduction in short-term repurchase
agreements was due to the maturity of an agreement in February 1999. Long-
term repurchase agreements totaled $51.3 million at both June 30, 1999 and
1998. Repurchase agreements are used to provide funding for the loan and
securities portfolios. At June 30, 1999 and 1998, the weighted average rate
of repurchase agreements was 5.67% and 5.76%, respectively.
Borrowed Funds. Total borrowed funds increased $48.8 million during fiscal
year 1999 and totaled $82.8 million at June 30, 1999 compared to $34.0
million at June 30, 1998. Both short- and long-term borrowed funds consist
of advances from the Federal Home Loan Bank of Cincinnati. The increase
during fiscal year 1999 was primarily used to fund growth in the securities
portfolio. At June 30, 1999 and 1998, the weighted average rate of total
borrowed funds was 5.06% and 5.60%, respectively, representing a 54 basis
point decline. 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 $17.2
million from June 30, 1998 and totaled $5.3 million at June 30, 1999. This
decline was primarily attributable to $16.6 million in securities purchased
and recorded on the trade date in June 1998 that did not settle until July
1998.
Stockholders' Equity. Total stockholders' equity declined $14.1 million, or
16.7%, during fiscal year 1999 and totaled $70.1 million at June 30, 1999
compared to $84.2 million at June 30, 1998. This decline resulted
principally from stock repurchases, dividends paid to stockholders and a
decline in market value of available-for-sale securities, net of tax
totaling $17.7 million, $3.1 million and $3.6 million, respectively,
partially offset by net income for fiscal year 1999 totaling $8.1 million
and other increases totaling $2.2 million. Refer to the Consolidated
Statement of Changes in Stockholders' Equity contained in this Annual Report
for additional detail. On January 19, 1999, the Company announced a 100%
stock dividend, which is equivalent to a two-for-one stock split, that was
paid on March 5, 1999 to stockholders of record on February 19, 1999. Refer
to Note 14 of the Notes to Consolidated Financial Statements contained in
this Annual Report for additional explanation of the stock dividend. On
February 16, 1999, the Company announced its intention to repurchase 10%, or
758,936 shares of its then outstanding shares of common stock in open market
transactions over a twelve month period beginning February 23, 1999. As of
the Company's last public announcement on August 4, 1999, 525,607 shares
have been repurchased at an average price of $18.31 per share. At June 30,
1999 and 1998, tangible book value per share was $9.81 and $10.49 per share,
respectively. The ratio of stockholders' equity to total assets at June 30,
1999 was 10.4% compared to 12.9% at June 30, 1998.
------------------------------
Photo of
Ronald P. Volpe, Ph.D.
------------------------------
Professor of Finance
Williamson College of Business Administration
Youngstown State University
------------------------------
Photo of
FFY Employees
------------------------------
Prior to publicly announcing the name change, First Federal hosted a
company gala at which the new name and logo were introduced to employees.
Results of Operations
The Company's results of operations depend primarily on the level of net
interest income, which is the difference, or "spread", between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities. Interest-earning assets consist primarily of
loans receivable and securities, whereas interest-bearing liabilities
consist primarily of deposits, repurchase agreements and borrowed funds. The
ratio of average interest-earning assets to average interest-bearing
liabilities during fiscal year 1999 was 1.13:1 compared to 1.15:1 during
fiscal year 1998. Net interest income is affected by both changes in the
level of interest rates and changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. Results of
operations are also dependent upon, among other things, the provision for
loan losses, non-interest income, non-interest expense and income taxes.
Comparison of Years Ended June 30, 1999 and 1998
General. The Company recorded net income for the year ended June 30, 1999 of
$8.1 million, an increase of $411,000, or 5.3%, from net income of $7.7
million for the year ended June 30, 1998. Basic and diluted earnings per
share for the year ended June 30, 1999 totaled $1.15 per share and $1.11 per
share, respectively, compared to $1.03 per share and $0.99 per share,
respectively, for the year ended June 30, 1998. This represents an increase
in basic and diluted earnings per share of 11.7% and 12.1%, respectively.
The Company's annualized return on average equity for fiscal year 1999 was
10.26% compared to 9.28% for fiscal year 1998.
Interest Income. Total interest income for the year ended June 30, 1999 was
$49.1 million, an increase of $1.1 million, or 2.2%, compared to $48.0
million for the year ended June 30, 1998. Interest income from loans
declined $738,000, or 1.9%, and totaled $39.0 million for the year ended
June 30, 1999 compared to $39.8 million for year ended June 30, 1998. This
decrease was the result of a 20 basis point decline in the average yield
earned on loans, from 8.59% to 8.39%, partially offset by an increase of
$2.5 million in the average balance of loans outstanding. The average yield
earned on loans declined due to a decrease in market rates for most of the
Company's current fiscal year. Although net loans receivable declined $28.6
million from June 30, 1998 to June 30, 1999, the average balance of loans
receivable increased as mentioned previously. The June 30, 1998 loans
receivable balance included approximately $17.1 million of short-term loans
(see "Loan Portfolio" on page 9) which remained outstanding for part of the
first quarter of fiscal year 1999, thus impacting the average balance for
the current year. Interest income from securities increased $1.9 million, or
25.3%, and totaled $9.5 million for the year ended June 30, 1999 compared to
$7.6 million for the year ended June 30, 1998. This increase was the result
of a $42.5 million increase in the average balance of securities, primarily
Federal agency obligations, municipal securities and trust preferred
securities. The increase in volume of securities was partially offset by a
29 basis point decline in the average yield on securities, from 6.41% to
6.12%. The decline in the weighted average yield was largely the result of
reinvesting proceeds from a high level of loan repayments and prepayments at
lower market rates.
Interest Expense. Interest expense increased $955,000, or 3.7%, and totaled
$26.5 million for the year ended June 30, 1999 compared to $25.6 million for
the year ended June 30, 1998. This increase was primarily due to volume
increases in long-term repurchase agreements and borrowed funds, partially
offset by a rate decline in deposits and, to a lesser extent, volume and
rate declines in short-term repurchase agreements. The average balance of
long-term repurchase agreements and borrowed funds increased $17.1 million
and $30.2 million, respectively. The average cost of interest on deposits
declined 28 basis points, from 4.77% for fiscal year 1998 to 4.49% for
fiscal year 1999. This decline in rate primarily reflects an overall
reduction in market interest rates throughout the Company's 1999 fiscal
year.
Net Interest Income. Net interest income increased $122,000 or 0.5%, and
totaled $22.5 million for the year ended June 30, 1999 compared to $22.4
million for the year ended June 30, 1998. The Company's net interest margin
(net interest income as a percentage of average interest-earning assets) was
3.62% for the year ended June 30, 1999, down 19 basis points from 3.81% for
the year ended June 30, 1998. The Company's net interest margin declined due
mainly to a lower yield earned on loans and securities as well as increased
borrowings, which tend to have a higher cost than core deposits. However,
the Company's net interest margin was positively affected by lower rates
paid on deposits and short-term borrowings.
Provision for Loan Losses. The provision for loan losses totaled $494,000
for the year ended June 30, 1999 compared to $566,000 for the year ended
June 30, 1998. The provision for loan losses reflects management's
evaluation of the underlying credit risk of the Bank's loan portfolio to
adequately provide for probable loan losses inherent in the loan portfolio
as of the balance sheet date. The allowance for loan losses totaled 112.3%
of non-performing assets at June 30, 1999, up from 82.4% at June 30, 1998
due primarily to a 29% decline in non-performing assets. More aggressive
collection efforts contributed to the decline in non-performing assets.
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 is adequate at June 30, 1999.
Non-Interest Income. Non-interest income totaled $2.6 million for the year
ended June 30, 1999, an increase of $785,000, or 44.5%, compared to $1.8
million for the year ended June 30, 1998. Largely contributing to this
increase was the Bank's secondary market operation which accounted for
$720,000 in gains from loan sales during the current fiscal year compared to
$134,000 in gains from loan sales during the prior fiscal year (see "Loan
Portfolio" on page 9). Service charge income increased 28.1% from $700,000
for the year ended June 30, 1998 to $897,000 for the year ended June 30,
1999 largely due to increased fees on NOW accounts and fees from a loan
extension program.
------------------------------
Photo of
Billboard Advertisement
------------------------------
This outdoor message was posted throughout the Mahoning Valley in mid-July.
Non-Interest Expense. Non-interest expense totaled $12.5 million for the
year ended June 30, 1999, an increase of $724,000, or 6.2%, compared to
$11.8 million for the year ended June 30, 1998. Largely contributing to this
increase were the activities of FFY Holding's insurance affiliate, Daniel W.
Landers Insurance Agency, Ltd. (Landers), which began operations on April 1,
1998, and therefore only had three months activity during the prior fiscal
year. Also contributing to the fiscal year 1999 growth in non-interest
expense was increased depreciation, primarily due to Year 2000 computer-
related purchases, and advertising. In addition, severance pay was awarded
to a long-tenured Company officer in December 1998 as a result of her
retirement. The Company's efficiency ratio totaled 49.8% for the year ended
June 30, 1999 compared to 49.1% for the year ended June 30, 1998.
Income Taxes. Federal income taxes totaled $4.0 million for the year ended
June 30, 1999, a decline of $107,000 compared to $4.1 million for the year
ended June 30, 1998. The decline in federal income taxes resulted from a
reduction in the Company's effective tax rate due to increased income from
tax-exempt securities.
Minority Interest. Minority interest in loss of consolidated subsidiaries
represents the portion of net loss from the real estate and insurance
affiliates not owned by FFY Holdings, Inc.
Comparison of Years Ended June 30, 1998 and 1997
General. Net income for the year ended June 30, 1998 totaled $7.7 million,
an increase of $2.4 million from net income of $5.3 million for the year
ended June 30, 1997. This increase was largely attributable to the one-time
Savings Association Insurance Fund (SAIF) special assessment of $2.0
million, net of taxes, recorded in fiscal year 1997. Basic and diluted
earnings per share for the year ended June 30, 1998 totaled $1.03 per share
and $0.99 per share, respectively, compared to $0.62 per share and $0.60 per
share, respectively, for the year ended June 30, 1997.
Net Interest Income. Net interest income increased $346,000, or 1.6%, and
totaled $22.4 million for the year ended June 30, 1998 compared to $22.1
million for the year ended June 30, 1997. The net interest margin for the
years ended June 30, 1998 and 1997 was 3.81% and 3.89%, respectively.
Although net interest income increased over fiscal year 1997, the net
interest margin dropped 8 basis points due mainly to a higher average
outstanding balance of repurchase agreements and borrowings during fiscal
year 1998 that were used to fund the growth in the loan and securities
portfolios. These sources of funds tend to have a higher cost than core
deposits.
Interest income from loans increased $1.4 million, or 3.6%, and totaled
$39.8 million for the year ended June 30, 1998 compared to $38.4 million for
year ended June 30, 1997. This increase was the result of an increase of
$11.2 million in the average balance of loans outstanding and a 9 basis
point increase in the average yield on loans, from 8.50% to 8.59%, despite a
relatively flat yield curve throughout the year. The average yield on loans
increased due to growth in the consumer loan portfolio, primarily home
equity loans and short-term notes, which tend to have higher interest rates
than traditional mortgage loans.
Interest income from securities increased $1.0 million, or 16.3%, and
totaled $7.6 million for the year ended June 30, 1998 compared to $6.6
million for the year ended June 30, 1997. This increase was the result of a
$22.1 million increase in the average balance of securities. The increase in
the average balance of securities was partially offset by a 10 basis point
decline in the average yield on securities, from 6.51% to 6.41%. The decline
in the weighted average yield was largely the result of a decline in the
yield on mortgage-backed securities caused by high loan prepayments over the
last six months of fiscal year 1998, primarily loan refinances due to the
low interest rate environment.
Interest expense increased $1.8 million, or 7.3%, and totaled $25.6 million
for the year ended June 30, 1998 compared to $23.8 million for the year
ended June 30, 1997. Interest expense increased due to more repurchase
agreements and borrowings partially offset by a decline in interest on
deposit accounts. Interest expense on short- and long-term repurchase
agreements increased $389,000 and $1.5 million, respectively, mainly due to
volume, to fund the growth in securities and loans. Interest expense on
borrowed funds increased $280,000, primarily due to volume. Interest expense
on deposits declined $417,000, or 1.9%, as a result of a decrease in the
average balance of interest-bearing deposits totaling $3.3 million from
$450.2 million at June 30, 1997 to $446.9 million at June 30, 1998 and a 6
basis point decrease in the average cost on deposits from 4.82% to 4.76%.
Provision for Loan Losses. The provision for loan losses declined $122,000
from $688,000 for the year ended June 30, 1997 and totaled $566,000 for the
year ended June 30, 1998. This decline reflected management's evaluation of
the underlying credit risk of First Federal's loan portfolio to adequately
provide for probable loan losses inherent in the loan portfolio as of the
balance sheet date. The allowance for loan losses totaled 82.4% of non-
performing assets at June 30, 1998, up from 74.2% and 73.6% at June 30, 1997
and 1996, respectively.
Non-Interest Income. Total non-interest income increased $1.1 million over
the year ended June 30, 1997 and totaled $1.8 million for the year ended
June 30, 1998. Service charges totaled $700,000 for the year ended June 30,
1998, an increase of $137,000, or 24.3%, compared to the year ended June 30,
1997 due to increases in fees associated with NOW accounts, automated teller
machines and debit cards. Sales of securities available for sale resulted in
a $246,000 gain for the year ended June 30, 1998 compared to a $320,000 loss
for the year ended June 30, 1997. The 1997 fiscal year loss was the result
of securities sold to fund a stock repurchase program (tender offer) in late
calendar year 1996. Other non-interest income increased $443,000 over the
year ended June 30, 1997 and totaled $818,000 for the year ended June 30,
1998, primarily reflecting the activities of FFY Holdings, Inc., which
include real estate brokerage services and insurance sales through its two
respective affiliations. Also contributing to the fiscal year 1998 increase
was a gain on sale of loans from First Federal's secondary market mortgage
operation which began in January 1998.
------------------------------
Photo of
A. Gary Bitonte, MD
------------------------------
Medical Consultant
Private Investments
Non-Interest Expense. Non-interest expense declined $2.5 million, or 17.6%,
from the year ended June 30, 1997 and totaled $11.8 million for the year
ended June 30, 1998. This decline was primarily due to fiscal year 1997
expenses that included the one-time SAIF assessment of $3.0 million.
Partially offsetting the SAIF assessment were expenses related to the
activities of FFY Holding's real estate and insurance affiliates and
increased professional services at the Bank. The Company's efficiency ratio
totaled 49.1% for the year ended June 30, 1998 compared to 62.0% (or 48.9%
without the effect of the SAIF assessment) for the year ended June 30, 1997.
Income Taxes. Federal income taxes increased $1.7 million over the year
ended June 30, 1997 and totaled $4.1 million for the year ended June 30,
1998. The increase in federal income taxes was due to the increase in net
income before tax resulting from the SAIF assessment recorded in the fiscal
year 1997 and the difference in the gain/loss on sale of securities.
The following table presents for the periods indicated average balance
sheets, the total dollar amount of interest income from average interest-
earning assets and the resultant yields, as well as the interest expense on
the average interest-bearing liabilities, and the resultant costs, expressed
both in dollars and rates. Average balances for all years presented are
daily average balances. Interest on non-accruing loans has been included in
the table to the extent received.
Average Balances, Interest Rates and Yields
(Dollars in Thousands)
Years ended June 30,
------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------------------------------------------------------------------------------------------------------
Interest-Earning Assets:
Loans receivable (1) $465,622 39,047 8.39% $463,118 39,785 8.59% $451,872 38,417 8.50%
Securities available
for sale, net (2) (3) 167,217 10,163 6.12% 124,764 7,916 6.41% 102,661 6,708 6.51%
FHLB Stock 4,677 333 7.12% 4,284 312 7.28% 3,935 279 7.09%
Other 3,343 151 4.52% 5,556 287 5.17% 13,356 676 5.06%
-------- ------ -------- ------ -------- ------
Total
interest-earning
assets (2) 640,859 49,694 7.77% 597,722 48,300 8.10% 571,824 46,080 8.05%
------ ------ ------
Noninterest-earning
assets 22,392 20,942 19,764
-------- -------- --------
Total assets $663,251 $618,664 $591,588
======== ======== ========
Interest-Bearing
Liabilities:
NOW accounts $ 63,148 1,613 2.55% $ 54,962 1,399 2.55% $ 53,259 1,355 2.54%
Savings accounts 92,049 2,091 2.27% 100,125 2,683 2.68% 110,177 3,302 3.00%
Certificate accounts 292,328 16,413 5.61% 291,841 17,200 5.89% 286,796 17,042 5.94%
Short-term repurchase
agreements 9,054 450 4.97% 15,241 872 5.72% 7,916 483 6.10%
Long-term repurchase
agreements 51,300 2,974 5.80% 34,241 2,043 5.97% 9,077 559 6.16%
Short-term borrowings 27,596 1,451 5.26% 24,004 1,362 5.67% 19,619 1,082 5.52%
Long-term borrowings 30,175 1,523 5.05% - - - - - -
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities 565,650 26,515 4.69% 520,414 25,559 4.91% 486,844 23,823 4.89%
------ ------ ------
Noninterest-bearing
liabilities (4) 18,291 14,935 11,807
-------- ------ -------
Total liabilities 583,941 535,349 498,651
Stockholders' equity 79,310 83,315 92,937
-------- ------ -------
Total liabilities
and equity $663,251 $618,664 $591,588
======== ======== ========
Net interest income 23,179 22,741 22,257
Less fully taxable
equivalent adjustment (610) (294) (155)
------ -------- ------
Net interest income per
statement of income 22,569 22,447 22,102
====== ======== ======
Net interest rate spread 3.08% 3.19% 3.16%
===== ===== =====
Net earning assets $ 75,209 $ 77,308 $ 84,980
======== ======== ========
Net yield on average
interest-earning
assets (2) 3.62% 3.81% 3.89%
===== ===== =====
Average interest-earning
assets to average
interest-bearing
liabilities 1.13 x 1.15 x 1.17 x
====== ======== ======
<FN>
<F1> Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
<F2> Yield is calculated without consideration of the unrealized gain (loss)
on securities available for sale.
<F3> Interest is presented on a fully taxable equivalent basis using the
Company's federal statutory tax rate of 34%.
<F4> Includes noninterest-bearing checking accounts.
</FN>
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in volume multiplied by old
rate) and (ii) changes in rate (changes in rate multiplied by old volume).
For purposes of this table, changes attributable to both rate and volume,
which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
Rate/Volume Analysis
(Dollars in Thousands)
Years ended June 30,
-------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------- -----------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
Interest-earning assets:
Loans receivable $ 210 (948) (738) 960 408 1,368
Securities (1) 2,620 (373) 2,247 1,313 (105) 1,208
FHLB stock 28 (7) 21 26 7 33
Other (103) (33) (136) (404) 15 (389)
----------------------------------------------------------------------
Total interest-earning assets $2,755 (1,361) 1,394 1,895 325 2,220
======================================================================
Interest-bearing liabilities:
NOW accounts $ 214 - 214 44 - 44
Savings accounts (204) (388) (592) (285) (334) (619)
Certificate accounts 29 (816) (787) 301 (143) 158
Short-term repurchase agreements (319) (103) (422) 421 (32) 389
Long-term repurchase agreements 991 (60) 931 1,502 (18) 1,484
Short-term borrowings 193 (104) 89 250 30 280
Long-term borrowings 1,523 - 1,523 - - -
----------------------------------------------------------------------
Total interest-bearing
liabilities $2,427 (1,471) 956 2,233 (497) 1,736
======================================================================
Net interest income (1) $ 438 484
====== =====
<FN>
<F1> Presented on a fully taxable equivalent basis.
</FN
------------------------------
Photo of
Lending Specialists
------------------------------
First Federal's experienced lending specialists offer both residential and
commercial real estate loans to customers.
Asset/Liability Management
Asset/liability management is the measurement and analysis of the Company's
exposure to changes in the interest rate environment. Management analyzes
the effects of interest rate changes on net portfolio value and net interest
income over specified periods of time by evaluating the Company's mix of
interest-earning assets and interest-bearing liabilities in varied interest
rate environments. The Company manages this risk on a continuing basis
through the use of a number of strategies as an ongoing part of its business
plan. The objective of the Company's asset/liability management is to
maintain consistent growth in net interest income within the Company's
policy guidelines. Management considers interest rate risk to be the
Company's most significant market risk.
Income simulation techniques and net portfolio value analysis are used to
determine the Company's sensitivity to changes in interest rates. The models
are based on actual cash flows and repricing characteristics for on and off
balance sheet instruments, and incorporate market-based assumptions
regarding the impact of changing interest rates on certain assets and
liabilities. Actual results will differ from simulated results due to
timing, magnitude and frequency of interest rate changes. Actual results may
also differ due to changes in market conditions and management strategies.
------------------------------
Photo of
Robert L. Wagmiller
------------------------------
Partner/Principal of
Hill, Barth & King, Inc.
The income simulation modeling employed by the Company measures changes in
net interest income over the next 12- and 24-month periods resulting from
hypothetical rising and declining interest rates. Key assumptions used in
this model include (i) reinvestment of security and mortgage cash flows,
(ii) loan prepayment speeds, (iii) reinvestment of certificate of deposit
maturities and (iv) deposit pricing strategies. As of June 30, 1999, the
Company's simulation modeling indicated that with a 200 basis point (bp)
increase in interest rates, the Company's net interest income would be 2.08
percent and 6.75 percent less than if rates remained constant over the next
12- and 24-month periods, respectively. As of the same date and a 200bp
decrease in interest rates, the Company's net interest income would be 0.08
percent more and 4.47 percent less than if rates remained constant over the
next 12- and 24-month periods, respectively. The percentage changes in net
interest income are within the acceptable range established by the Company's
board of directors in both a rising and falling rate environment.
------------------------------
Photo of
Marie Izzo Cartwright
------------------------------
Vice President
Glimcher Properties Limited Partnership
The Bank measures the effect of interest rate changes on its net portfolio
value (NPV), which is the difference between the market value of the Bank's
assets and liabilities, under different interest rate scenarios. Changes in
NPV are measured using interest rate shocks rather than changes in interest
rates over a period of time as are assumed with the income simulation model.
At June 30, 1999, the Bank's NPV ratio, using interest rate shocks ranging
from a 300bp rise in rates to a 300bp decline in rates are shown in the
following table:
Net Portfolio Value
(Bank only)
Basis Point
Change in 6/30/99
Rates NPV Ratio
----------- ---------
+300 5.26%
+200 7.03%
+100 8.66%
Base 10.24%
-100 10.59%
-200 11.36%
-300 11.95%
A significant part of First Federal's asset/liability management focuses on
originating adjustable-rate mortgage loans (ARMs). ARM originations totaled
56.3%, 37.2% and 28.4% of portfolio originations in fiscal years 1999, 1998
and 1997, respectively. Largely contributing to the continued growth in ARM
originations over the past two fiscal years was the Bank's 7/1-year ARM
product. This product, where the interest rate is fixed for seven years and
adjusts every year thereafter, accounted for 47.4% and 32.4% of total
adjustable-rate loans at June 30, 1999 and 1998, respectively. At June 30,
1999, loans with an adjustable rate feature totaled $191.5 million, or 40.1%
of the gross loan portfolio compared to $160.4 million, or 32.5% of the
gross loan portfolio at June 30, 1998. In addition to the 7/1-year ARM,
growth in the Bank's adjustable rate loans is also attributable to the
Bank's secondary market operation, which is currently designed to sell
fixed-rate mortgage loans to Fannie Mae, thus decreasing the Bank's exposure
to interest rate risk and provide income from sales and servicing.
Additionally, the servicing asset hedges the Bank against rising rates, as
it becomes more valuable in a rising rate environment, offsetting the
decline in the value of other longer term assets in a rising rate
environment.
In order to consolidate its customer base and reduce interest rate risk
while maintaining adequate returns, First Federal has increased its
investment in consumer loans over the past several years. While consumer
loans are believed to have a greater risk of default than mortgage loans,
consumer loans are typically much shorter in duration than mortgage loans
which serves to reduce interest rate risk. Management intends to continue to
expand the Bank's consumer loan portfolio over the next several years.
Over the past three fiscal years, the Company increased its investments in
adjustable-rate securities in an attempt to reduce interest rate risk. At
June 30, 1999, the market value of adjustable-rate securities totaled $46.1
million, or 24.2% of the total securities portfolio compared to a market
value of $694,000, or 0.6% of the total securities portfolio at June 30,
1996.
The Company's management may, at times, place greater emphasis on maximizing
net interest margin rather than merely concentrating on interest rate risk
depending on the relationship between short- and long-term interest rates,
market conditions and consumer preference. Management believes that
increased net income resulting from a moderate contrast between the maturity
of its assets and liabilities can provide high enough returns to justify the
increased risk exposure during periods of stable interest rates. Management
has established limits on the amount of its interest rate risk exposure.
There can be no assurance, however, that management's efforts to limit
interest rate risk will be successful.
------------------------------
Photo of
Jeffrey L. Francis
------------------------------
President and CEO of
FFY Financial Corp. and First Federal Savings Bank
Liquidity and Cash Flows
In general terms, liquidity is a measurement of the Company's ability to
meet its cash needs. The Company's objective in liquidity management is to
maintain the ability to meet loan commitments, purchase securities or to
repay deposits and other liabilities in accordance with their terms without
an adverse impact on current or future earnings. The 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.
Federal regulations 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 Bank's
liquidity exceeded the applicable liquidity requirement at June 30, 1999 and
1998. Simply meeting the liquidity requirement does not automatically mean
the Bank has sufficient liquidity for a safe and sound operation.
Regulations also include 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, the ability to obtain deposits by offering
above-market interest rates and access to advances from the Federal Home
Loan Bank.
------------------------------
Photo of
William A. Russell
------------------------------
President
Canteen Services of Steel Valley, Inc.
The primary investing activities of the Company are originating loans and
purchasing securities. The fiscal year 1999 decline in loans receivable
provided $29.2 million, whereas fiscal year 1998 increases in loans
receivable used $21.6 million and $22.1 million, respectively, during fiscal
years 1998 and 1997. Growth in the Company's securities portfolio used $72.0
million, $11.5 million and $1.4 million, respectively, during fiscal years
1999, 1998 and 1997. Generally, during periods of declining interest rates,
the Bank would be expected to experience increased loan prepayments, which
would likely be reinvested at lower interest rates. During periods 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 Company are deposits, repurchase
agreements and borrowings. The fiscal year 1999 increase in deposit accounts
provided $10.7 million, whereas declines in deposit accounts used $6.1
million during both fiscal years 1998 and 1997. Repurchase agreements used
$6.5 million during fiscal year 1999 and provided $32.1 million and $25.7
million, respectively, during fiscal years 1998 and 1997. Borrowed funds
provided $48.8 million, $6.5 million and $26.3 million, respectively, during
fiscal years 1999, 1998 and 1997.
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 June 30, 1999, the minimum
capital regulations require savings 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%.
------------------------------
Photo of
Henry P. Nemenz
------------------------------
President
H.P. Nemenz Food Stores, Inc.
------------------------------
Photo of
Executive Staff
------------------------------
The executive staff of First Federal Savings Bank of Youngstown (l to r):
Jeffrey L. Francis, Joseph R. Sainato, Mark Makoski, Randy Shaffer, J.
Craig Carr, Therese Ann Liutkus, Timm B. Schreiber and David S. Hinkle
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 June 30, 1999, the Bank met 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.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the
change in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of the Bank's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Market Prices and Dividends Declared
The common stock of FFY Financial Corp. trades on The Nasdaq Stock Market
under the symbol "FFYF". As of July 31, 1999, there were 7,078,865 shares
outstanding held by approximately 1,328 stockholders of record (not
including the number of persons or entities holding stock in nominee or
street name through various brokerage firms). The table below
shows the reported high and low trade prices of the common stock and cash
dividends per share declared during the years ended June 30, 1999 and 1998.
June 30, 1999: High Low Dividends
---------------------------------------------------------
First quarter $18 11/16 $13 1/8 $0.1125
Second quarter 17 3/4 13 1/4 0.1125
Third quarter 18 7/8 16 3/4 0.1125
Fourth quarter 19 - 16 7/8 0.1125
June 30, 1998:
--------------------------------------------------------
First quarter $14 7/16 $12 3/4 $0.10
Second quarter 16 9/16 13 13/16 0.10
Third quarter 18 - 15 15/16 0.10
Fourth quarter 17 5/8 16 3/16 0.10
Quarterly Earnings Summary
- -----------------------------------------------------------------------------
FFY Financial Corp. and Subsidiaries
(Dollars in Thousands Except Per Share Data)
Quarter ended fiscal 1999 September 30 December 31 March 31 June 30
- -------------------------------------------------------------------------------------------
Total interest income $12,161 12,384 12,241 12,297
Total interest expense 6,711 6,742 6,522 6,539
------------------------------------------------------
Net interest income 5,450 5,642 5,719 5,758
Provision for loan losses 125 124 131 114
------------------------------------------------------
Net interest income
after provision for
loan losses 5,325 5,518 5,588 5,644
Service charges 198 218 217 264
Gain (loss) on sale of securities
available for sale 64 (7) 54 91
Gain on sale of loans 112 277 202 129
Other non-interest income 243 194 113 179
Non-interest expense (3,126) (3,138) (3,048) (3,182)
------------------------------------------------------
Income before income taxes
and minority interest 2,816 3,062 3,126 3,125
Income tax expense 931 1,029 1,086 1,037
Minority interest in gain (loss)
of consolidated subsidiaries - - (106) 12
------------------------------------------------------
Net income $ 1,885 2,033 2,146 2,076
======================================================
Basic earnings per share $ 0.26 (1) 0.28 0.31 0.31
======================================================
Diluted earnings per share $ 0.25 (1) 0.27 0.30 0.30
======================================================
Quarter ended fiscal 1998 September 30 December 31 March 31 June 30
- -------------------------------------------------------------------------------------------
Total interest income $11,958 12,004 12,074 11,969
Total interest expense 6,475 6,351 6,317 6,416
------------------------------------------------------
Net interest income 5,483 5,653 5,757 5,553
Provision for loan losses 142 184 115 124
------------------------------------------------------
Net interest income
after provision for
loan losses 5,341 5,469 5,642 5,429
Service charges 170 183 162 186
Gain on sale of securities
available for sale 48 51 54 93
Gain on sale of loans - 2 31 101
Other non-interest income 110 143 263 168
Non-interest expense (2,761) (2,920) (3,056) (3,033)
------------------------------------------------------
Income before income
taxes 2,908 2,928 3,096 2,944
Income tax expense 1,005 988 1,128 1,026
------------------------------------------------------
Net income $ 1,903 1,940 1,968 1,918
======================================================
Basic earnings per share (1)
$ 0.25 0.26 0.26 0.26
======================================================
Diluted earnings
per share (1) $ 0.24 0.25 0.25 0.25
======================================================
<FN>
<F1> Per share figures were restated to reflect a 100% stock dividend,
effected in the form of a two-for-one stock split, declared on
January 19, 1999.
Note: Certain amounts in the 1999 and 1998 quarterly earnings data have
been reclassified to conform with the presentation of the Selected
Consolidated Financial Information included in this Annual Report.
</FN>
FFY Financial Corp. and Subsidiaries
Consolidated Financial Statements
June 30, 1999 and 1998
(With Independent Auditors' Report Thereon)
FFY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
Assets 1999 1998
------ ---- ----
Cash $ 5,362,745 4,362,127
Interest-bearing deposits 5,245,061 5,713,055
Short-term investments 865,000 -
------------------------------
Total cash and cash equivalents 11,472,806 10,075,182
Securities available for sale 190,325,599 140,793,201
Loans receivable, net of allowance for loan losses of
$2,645,132 and $2,740,169, respectively 453,839,111 482,463,396
Loans available for sale 441,500 -
Interest and dividends receivable on securities 1,953,940 1,421,574
Interest receivable on loans 2,707,846 2,698,117
Federal Home Loan Bank stock, at cost 4,841,200 4,511,500
Office properties and equipment, net 7,218,640 7,920,660
Other assets 2,890,372 1,862,863
------------------------------
Total assets $675,691,014 651,746,493
==============================
Liabilities and Stockholders' Equity
------------------------------------
Deposits $457,342,802 444,017,422
Securities sold under agreements to repurchase:
Short-term 6,617,747 13,088,323
Long-term 51,300,000 51,300,000
Borrowed funds:
Short-term 22,800,000 33,985,000
Long-term 60,000,000 -
Advance payments by borrowers for taxes and insurance 2,221,976 2,621,514
Other payables and accrued expenses 5,291,964 22,518,533
------------------------------
Total liabilities 605,574,489 567,530,792
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 7,589,366 and 6,630,000 shares, respectively 75,894 66,300
Additional paid-in capital 38,092,628 65,118,141
Retained earnings, substantially restricted 46,243,673 79,428,438
Treasury stock, at cost (467,987 and 2,619,010 shares,
respectively) (8,551,484) (57,893,563)
Accumulated other comprehensive income (loss) (2,816,864) 812,737
Common stock purchased by:
Employee Stock Ownership and 401(k) Plan (2,645,532) (3,034,562)
Recognition and Retention Plans (281,790) (281,790)
------------------------------
Total stockholders' equity 70,116,525 84,215,701
------------------------------
Total liabilities and stockholders' equity $675,691,014 651,746,493
==============================
See accompanying notes to financial statements.
FFY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Interest income:
Loans $39,046,983 39,785,064 38,417,621
Securities available for sale 9,552,383 7,622,185 6,552,936
Federal Home Loan Bank stock 333,072 312,213 278,841
Other interest-earning assets 151,179 286,969 675,843
---------------------------------------------
Total interest income 49,083,617 48,006,431 45,925,241
---------------------------------------------
Interest expense:
Deposits 20,116,405 21,282,008 21,699,053
Securities sold under agreements to repurchase:
Short-term 449,923 871,761 483,448
Long-term 2,974,050 2,043,340 559,167
Borrowed funds:
Short-term 1,451,527 1,361,933 1,082,015
Long-term 1,522,577 - -
---------------------------------------------
Total interest expense 26,514,482 25,559,042 23,823,683
---------------------------------------------
Net interest income 22,569,135 22,447,389 22,101,558
Provision for loan losses 494,438 565,521 687,642
---------------------------------------------
Net interest income after provision for
loan losses 22,074,697 21,881,868 21,413,916
---------------------------------------------
Noninterest income:
Service charges 897,011 700,445 563,443
Gain (loss) on sale of securities available for sale 203,317 246,473 (320,290)
Gain on sale of loans 720,153 134,211 -
Other 729,529 683,847 375,217
---------------------------------------------
Total noninterest income 2,550,010 1,764,976 618,370
---------------------------------------------
Noninterest expense:
Salaries and employee benefits 6,456,173 6,076,824 5,883,557
Net occupancy and equipment 2,043,578 1,805,939 1,644,858
Insurance and bonding 478,923 493,752 3,839,783
State and local taxes 993,634 1,077,154 1,085,987
Other 2,522,740 2,316,964 1,834,158
---------------------------------------------
Total noninterest expense 12,495,048 11,770,633 14,288,343
---------------------------------------------
Income before income taxes and
minority interest 12,129,659 11,876,211 7,743,943
Income tax expense:
Federal 4,040,000 4,147,000 2,420,000
State 43,000 - -
Minority interest in loss of consolidated subsidiaries (93,446) - -
---------------------------------------------
Net income $ 8,140,105 7,729,211 5,323,943
=============================================
Basic earnings per share $ 1.15 1.03 0.62
=============================================
Diluted earnings per share $ 1.11 0.99 0.60
=============================================
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1999, 1998 and 1997
Common stock
---------------------- Additional
Shares paid-in
outstanding Amount capital
----------- ------ ----------
Balance at June 30, 1996 5,081,198 $66,300 63,529,201
Comprehensive income:
Net income - - -
Change in unrealized holding gain
(loss) on securities
available for sale, net - - -
-------------------------------------
Comprehensive income - - -
Dividends paid, $.675 per share - - -
Treasury stock purchased (994,210) - -
Stock options exercised 59,352 - (532,457)
Common stock used to exercise options (1,500) - -
Amortization of KSOP expense - - -
Amortization of RRP stock awards - - -
Tax benefit related to RRP stock awards - - 296,657
Tax benefit related to exercise
of stock options - - 575,301
Difference between average fair value
per share and cost per share on KSOP
shares committed to be released - - 637,871
-------------------------------------
Balance at June 30, 1997 4,144,840 66,300 64,506,573
Comprehensive income:
Net income - - -
Change in unrealized holding gain on
securities available for sale, net - - -
-------------------------------------
Comprehensive income - - -
Dividends paid, $.775 per share - - -
Treasury stock purchased (167,543) - -
Stock options exercised 33,693 - (396,676)
Amortization of KSOP expense - - -
Tax benefit related to exercise
of stock options - - 152,987
Difference between average fair value
per share and cost per share on KSOP
shares committed to be released - - 855,257
-------------------------------------
Balance at June 30, 1998 4,010,990 66,300 65,118,141
Comprehensive income:
Net income - - -
Change in unrealized holding gain
(loss) on securities available
for sale, net - - -
-------------------------------------
Comprehensive income - - -
Distribution of 100% stock dividend 4,010,990 9,594 (27,525,112)
Dividends paid, $.4375 per share - - -
Treasury stock purchased (1,008,899) - -
Stock options exercised 108,298 - (720,004)
Amortization of KSOP expense - - -
Tax benefit related to exercise
of stock options - - 295,643
Difference between average fair value
per share and cost per share on KSOP
shares committed to be released - - 923,960
-------------------------------------
Balance at June 30, 1999 7,121,379 $75,894 38,092,628
=====================================
Common stock
purchased by
Accumulated --------------------------
Other Employee Recognition
Comprehen- Stock Own- and
Retained Treasury sive Income ership and Retention
Earnings Stock (Loss) 401(k) Plan Plans Total
-------- -------- ----------- ----------- ----------- -----
Balance at June 30, 1996 72,165,978 (28,492,183) (869,461) (3,865,692) (613,290) 101,920,853
Comprehensive income:
Net income 5,323,943 - - - - 5,323,943
Change in unrealized holding gain
(loss) on securities
available for sale, net - - 981,257 - - 981,257
--------------------------------------------------------------------------------------
Comprehensive income 5,323,943 - 981,257 - - 6,305,200
Dividends paid, $.675 per share (2,889,944) - - - - (2,889,944)
Treasury stock purchased - (25,982,802) - - - (25,982,802)
Stock options exercised - 1,125,977 - - - 593,520
Common stock used to exercise options - (38,250) - - - (38,250)
Amortization of KSOP expense - - - 424,310 - 424,310
Amortization of RRP stock awards - - - - 331,500 331,500
Tax benefit related to RRP stock awards - - - - - 296,657
Tax benefit related to exercise
of stock options - - - - - 575,301
Difference between average fair value
per share and cost per share on KSOP
shares committed to be released - - - - - 637,871
--------------------------------------------------------------------------------------
Balance at June 30, 1997 74,599,977 (53,387,258) 111,796 (3,441,382) (281,790) 82,174,216
Comprehensive income:
Net income 7,729,211 - - - - 7,729,211
Change in unrealized holding gain on
securities available for sale, net - - 700,941 - - 700,941
--------------------------------------------------------------------------------------
Comprehensive income 7,729,211 - 700,941 - - 8,430,152
Dividends paid, $.775 per share (2,900,750) - - - - (2,900,750)
Treasury stock purchased - (5,239,911) - - - (5,239,911)
Stock options exercised - 733,606 - - - 336,930
Amortization of KSOP expense - - - 406,820 - 406,820
Tax benefit related to exercise
of stock options - - - - - 152,987
Difference between average fair value
per share and cost per share on KSOP
shares committed to be released - - - - - 855,257
--------------------------------------------------------------------------------------
Balance at June 30, 1998 79,428,438 (57,893,563) 812,737 (3,034,562) (281,790) 84,215,701
Comprehensive income:
Net income 8,140,105 - - - - 8,140,105
Change in unrealized holding gain
(loss) on securities available
for sale, net - - (3,629,601) - - (3,629,601)
--------------------------------------------------------------------------------------
Comprehensive income 8,140,10 - (3,629,601) - - 4,510,504
Distribution of 100% stock dividend (38,222,741) 65,738,259 - - - -
Dividends paid, $.4375+A59 per share+A39 (3,102,129) - - - - (3,102,129)
Treasury stock purchased - (17,675,478) - - - (17,675,478)
Stock options exercised - 1,279,298 - - - 559,294
Amortization of KSOP expense - - - 389,030 - 389,030
Tax benefit related to exercise
of stock options - - - - - 295,643
Difference between average fair value
per share and cost per share on KSOP
shares committed to be released - - - - - 923,960
--------------------------------------------------------------------------------------
Balance at June 30, 1999 46,243,673 (8,551,484) (2,816,864) (2,645,532) (281,790) 70,116,525
======================================================================================
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $ 8,140,105 7,729,211 5,323,943
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,135,772 969,042 909,632
Amortization and accretion 344,464 381,801 406,691
Increase (decrease) in accrued federal income taxes (1,323,643) (487,987) 153,039
Deferred federal income taxes 1,593,000 261,000 696,000
Net (gain) loss on sale of securities (203,317) (246,473) 320,290
Gain on sale of loans (720,153) (134,211) -
Loans originated held for sale (30,855,271) (4,988,080) -
Proceeds from sales of loans originated for sale 31,128,924 5,077,069 -
Provision for loan losses 494,438 565,521 687,642
Federal Home Loan Bank stock dividend (329,700) (304,700) (270,400)
(Increase) decrease in interest receivable (542,095) (355,161) 393,880
Tax benefits related to employee plans 295,643 152,987 871,958
Other, net 1,205,683 1,043,628 742,199
------------------------------------------------
Net cash provided by operating activities 10,363,850 9,663,647 10,234,874
------------------------------------------------
Cash flows from investing activities:
Proceeds from maturity of securities available for sale 10,697,077 16,727,605 30,000,000
Proceeds from sales of securities available for sale 35,698,278 41,929,782 44,044,024
Purchase of securities available for sale (144,809,607) (99,324,173) (83,710,035)
Purchase of Federal Home Loan Bank stock - (112,300) (50,300)
Principal receipts on securities available for sale 26,370,997 29,165,393 8,308,925
Net (increase) decrease in loans 29,154,107 (21,563,866) (22,119,550)
Purchase of office properties and equipment (554,064) (1,136,981) (747,167)
Increase in investment in real estate development joint venture (128,639) (766,241) -
Other, net (59,115) (6,017) 14,466
------------------------------------------------
Net cash used in investing activities (43,630,966) (35,086,798) (24,259,637)
------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 13,371,715 (6,138,251) (6,138,675)
Net increase (decrease) in securities sold under agreements to repurchase:
Short-term (6,470,576) 5,781,075 667,695
Long-term - 26,300,000 25,000,000
Net increase (decrease) in short-term borrowed funds (11,185,000) 6,530,000 26,255,000
Proceeds from long-term borrowings 60,000,000 - -
Treasury stock purchases (17,675,478) (5,239,911) (25,982,802)
Dividends paid (3,102,129) (2,900,750) (2,889,944)
Proceeds from stock options exercised 559,294 336,930 555,270
Increase (decrease) in amounts due to bank (368,059) 695,939 (1,551,024)
Other, net (465,027) 125,546 (145,399)
------------------------------------------------
Net cash provided by financing activities 34,664,740 25,490,578 15,770,121
Net increase in cash and cash equivalents 1,397,624 67,427 1,745,358
Cash and cash equivalents at beginning of year 10,075,182 10,007,755 8,262,397
------------------------------------------------
Cash and cash equivalents at end of year $ 11,472,806 10,075,182 10,007,755
================================================
Supplemental disclosure of cash flow information:
Cash payments of interest expense $ 25,377,616 25,095,614 23,716,934
Cash payments of federal income taxes 3,475,000 4,150,000 780,000
================================================
Supplemental schedule of non-cash investing activities:
Real estate acquired through foreclosure $ 936,116 643,725 479,854
Real estate sales by loan issuance 742,543 543,500 455,400
================================================
See accompanying notes to consolidated financial statements.
FFY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The 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. The
consolidated financial statements also include the accounts of
First Real Estate, Ltd. and Daniel W. Landers Insurance Agency,
Ltd., affiliates of which FFY Holdings, Inc. has a two-thirds
controlling interest. 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. The
preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of
the consolidated statement of financial condition and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with
maturities of three months or less to be cash equivalents. Cash
equivalents include interest-bearing deposits and short-term
investments.
(d) Securities
----------
Management determines the appropriate classification of
securities at the time of purchase. Debt and equity securities,
including mortgage-backed securities, are classified as
available for sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a
component of accumulated other comprehensive income (loss), net
of tax. Available-for-sale securities are those which management
may decide to sell, if needed, for liquidity, asset/liability
management, or other reasons. Gains or losses on the sale of
securities are recognized using the specific identification
method. A decline in the fair value of any security below cost
that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security. Premiums and discounts are amortized or accreted over
the life of the related security as an adjustment to yield using
the interest method. Dividends and interest income are
recognized when earned.
(e) Loans and Related Fees and Costs
--------------------------------
Loans receivable originated with the intent to hold to maturity
are carried at unpaid principal balances, less the allowance for
loan losses and net deferred loan origination fees. Interest on
loans is accrued and credited to income as earned. The accrual
of interest is discontinued generally when a loan is more than
90 days delinquent or otherwise doubtful of collection. Such
interest ultimately collected is credited to income in the
period of recovery. Loans are returned to accrual status when
both principal and interest are current, and the loan is deter
mined to be performing in accordance with the applicable loan
terms.
Loan origination fees and certain direct loan origination costs
are deferred, and the net amounts are amortized as an adjustment
of the related loan's yield. The Bank is amortizing these
amounts using the interest method over the contractual life of
the related loans.
The Company currently sells loans to Federal National Mortgage
Association in the secondary market and delivers shortly after
funding. Mortgage loans held for sale are carried at the lower
of cost or market value, determined on a net aggregate basis.
Mortgage servicing rights associated with loans originated and
sold, where servicing is retained, are capitalized and included
in other assets in the statement of financial condition. The
servicing rights capitalized are amortized in proportion to and
over the period of estimated servicing income. Management
measures impairment of servicing rights based on prepayment
trends and external market factors. Any impairment is recorded
as a valuation allowance. The Company accounts for mortgage
servicing rights under Statement of Financial Accounting
Standards (SFAS) No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. The
adoption of SFAS No. 125 on January 1, 1997 did not have a
material impact on the Company's financial condition or results
of operations.
(f) Provision for Loan Losses
-------------------------
The allowance for loan losses is maintained at a level adequate
to absorb probable losses inherent in the loan portfolio as of
the balance sheet date. The provision for loan losses charged
to expense is based on management's judgment taking into
consideration past experience, current and estimated future
economic conditions, known and inherent risks in the loan
portfolio, and the estimated value of underlying collateral.
While management uses the best information available to make
these evaluations, future adjustments to the allowance may
become necessary if economic conditions change substantially
from the assumptions used in making the evaluations.
Additionally, various regulatory agencies, as an integral part
of their examination process, periodically review the allowance
for loan losses. Such agencies may require the recognition of
additions to the reserve based on their judgments of information
available to them at the time of their examination.
Management considers a loan impaired when, based on current
information and events, it is probable that the Company will be
unable to collect all amounts of principal and interest under
the original terms of the loan agreement. Significant factors
impacting management's judgment in determining when a loan is
impaired include an evaluation of compliance with repayment
program, condition of collateral, deterioration in financial
strength of the borrower or any case when the expected future cash
payments may be less than the recorded amount. Since the Bank's
loans are primarily collateral dependent, measurement of
impairment is based on the fair value of the collateral.
Management excludes large groups of smaller balance homogeneous
loans such as residential mortgages and consumer loans which are
collectively evaluated.
(g) Office Properties and Equipment
-------------------------------
Land is carried at cost. Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the estimated useful
lives of the assets. Estimated lives are 10 to 40 years for
office properties, including improvements, and 3 to 10 years for
equipment. Leasehold improvements are depreciated using the
straight-line method over the terms of the related leases.
(h) Repurchase Agreements
---------------------
The Bank enters into sales of securities under agreements to
repurchase securities of the same agency bearing the identical
contract rate and similar remaining weighted average maturities
as the original securities that result in approximately the same
market yield.
(i) Income Taxes
------------
The Company files a consolidated federal income tax return.
The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized as income or expense in the
period that includes the enactment date.
(j) Earnings Per Share
------------------
Basic earnings per share of common stock for the years ended
June 30, 1999, 1998 and 1997 have been determined by dividing
net income for the year by the weighted average number of shares
of common stock outstanding during the year. Diluted earnings
per share of common stock for the years ended June 30, 1999,
1998 and 1997 have been determined by dividing net income for
the year by the weighted average number of shares of common
stock outstanding during the year adjusted for the dilutive
effect of outstanding stock options. Total shares outstanding
for earnings per share calculation purposes have been reduced by
the KSOP shares that have not been committed to be released. In
addition, weighted average common and common equivalent shares
have been restated to reflect a 100% stock dividend, effected in
the form of a two-for-one stock split, declared on January 19,
1999. The computation of basic and diluted earnings per share
is shown in the table below.
Years ended June 30,
------------------------------------
1999 1998 1997
---- ---- ----
Basic earnings per share computation:
Numerator - Net income $8,140,105 7,729,211 5,323,943
Denominator -
Weighted average common shares
outstanding 7,072,607 7,515,890 8,650,456
Basic earnings per share $ 1.15 1.03 0.62
====================================
Diluted earnings per share computation:
Numerator - Net income $8,140,105 7,729,211 5,323,943
Denominator -
Weighted average common shares
outstanding 7,072,607 7,515,890 8,650,456
Dilutive effect of stock options 234,046 278,162 277,182
------------------------------------
Weighted average common shares and
common stock equivalents 7,306,653 7,794,052 8,927,638
Diluted earnings per share $ 1.11 0.99 0.60
====================================
(k) Effect of New Financial Accounting Standards
--------------------------------------------
On July 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standard No. 130, Reporting
Comprehensive Income. This Statement establishes standards for
reporting and display of comprehensive income and its
components. Comprehensive income consists of net income and
other comprehensive income, which for the Company is comprised
entirely of unrealized holding gains and losses on securities
available-for-sale, net of the related tax effect. As permitted
by SFAS No. 130, the Company has elected to disclose the
components of comprehensive income in the Consolidated
Statements of Changes in Stockholders' Equity. Other
comprehensive income (loss) for the years ended June 30, 1999,
1998 and 1997 was ($5,500,601), $1,062,941 and $1,486,257,
respectively. The related tax (expense) benefit for the years
ended June 30, 1999, 1998 and 1997 was $1,871,000, ($362,000)
and ($505,000), 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. The Company determined that the adoption of SFAS No.
131 has no effect on its consolidated financial statements as
the Company's operations are managed and performance is
evaluated on a corporate-wide basis. Accordingly, all of the
Company's operations are considered by management to be
aggregated in one reportable operating segment.
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 Company's adoption of SFAS No. 132
on July 1, 1998 had no effect on its consolidated statements of
financial condition or income since it only addresses disclosure
requirments.
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, 2000. 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 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 on 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.
(l) Reclassifications
-----------------
Certain amounts in the prior year consolidated financial
statements have been reclassified to conform with the current
year's presentation.
(2) Securities
----------
A summary of securities available for sale is as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------------------------------------------------
June 30, 1999
Federal agency obligations $ 33,957,204 37,454 (350,690) 33,643,968
Mortgage-backed securities 74,454,008 13,833 (2,268,422) 72,199,419
Municipal securities 46,707,415 251,106 (1,982,949) 44,975,572
Trust preferred securities 24,581,418 9,339 (381,382) 24,209,375
Asset-backed SLMA's 11,493,465 - (26,215) 11,467,250
Equity securities 1,798,791 509,914 (43,290) 2,265,415
Other securities 1,602,162 - (37,562) 1,564,600
--------------------------------------------------------
Totals $194,594,463 821,646 (5,090,510) 190,325,599
========================================================
June 30, 1998
Federal agency obligations $ 35,049,270 234,661 (1,374) 35,282,557
Mortgage-backed securities 81,580,115 150,652 (287,033) 81,443,734
Municipal securities 20,778,093 310,930 (39,747) 21,049,276
Equity securities 637,000 622,156 - 1,259,156
Other securities 1,516,986 261,674 (20,182) 1,758,478
--------------------------------------------------------
Totals $139,561,464 1,580,073 (348,336) 140,793,201
========================================================
The amortized cost and fair values of debt securities available
for sale at June 30, 1999, by contractual maturity, are shown
below. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. Equity
securities do not have a contractual maturity.
Amortized
Cost Fair Value
--------- ----------
Within one year $ 10,159,931 10,174,124
After one year through five years 20,710,421 20,295,499
After five years through ten years 32,689,599 32,269,389
After ten years 129,235,721 125,321,172
$192,795,672 188,060,184
The weighted average tax-equivalent annual yield of securities
available for sale at June 30, 1999 and 1998 was 6.32% and
6.28%, respectively.
Gross proceeds from sales of securities available for sale
during the years ended June 30, 1999, 1998 and 1997 totaled
$35,698,278; $41,929,782; and $44,044,024, respectively. Gross
realized gains and losses on sales of securities available for
sale totaled $385,137 and $181,820, respectively, during the
year ended June 30, 1999; $324,487 and $78,014, respectively,
during the year ended June 30, 1998; and $133,222 and $453,512,
respectively, during the year ended June 30, 1997.
(3) Loans Receivable
----------------
Following is a summary of loans receivable at June 30, 1999 and 1998:
1999 1998
---- ----
First mortgage loans:
Secured by one-to-four family residences $335,064,165 354,202,256
Secured by other properties 15,579,362 15,658,952
Commercial 33,710,361 28,606,137
Construction and development loans,
primarily residential 28,084,891 23,998,473
---------------------------
412,438,779 422,465,818
Consumer and other loans:
Automobile 8,479,939 12,161,179
Home equity 37,876,768 37,911,516
90-day notes 3,416,013 17,677,306
Other 5,139,029 4,132,170
---------------------------
54,911,749 71,882,171
---------------------------
467,350,528 494,347,989
Less:
Undisbursed loans in process 7,969,623 6,556,642
Net deferred loan origination fees 2,455,162 2,587,782
Allowance for loan losses 2,645,132 2,740,169
Loans available for sale 441,500 -
---------------------------
13,511,417 11,884,593
---------------------------
$453,839,111 482,463,396
===========================
Weighted average annual yield at year-end 8.05% 8.21%
Activity in the allowance for loan losses for the years ended June 30,
1999, 1998 and 1997 is summarized as follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year $2,740,169 2,961,810 3,439,305
Provision charged to operations 494,438 565,521 687,642
Charge-offs (723,383) (839,704) (1,198,867)
Recoveries 133,908 52,542 33,730
---------------------------------------
Balance at end of year $2,645,132 2,740,169 2,961,810
=======================================
Real estate owned, troubled debt restructurings, and nonaccrual loans,
as well as the related impact on income in the accompanying
consolidated statements of income, were immaterial for 1999, 1998 and
1997. At June 30, 1999 and 1998, non-accrual loans consisted primarily
of one-to-four family residences and amounted to $2,160,290 and
$2,733,572, respectively. At June 30, 1999, the recorded investment in
loans which have been identified as being impaired totaled $1,591,754.
No valuation allowance has been recorded on impaired loans since the
fair value of the underlying collateral exceeds the recorded
investment on an individual loan by loan basis. Average impaired loans
for the year ended June 30, 1999 totaled $1,606,423. Impaired loans
were immaterial at June 30, 1998.
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The
outstanding principal balance of loans serviced for others totaled
$35,050,912 and $4,970,433 at June 30, 1999 and 1998, respectively.
Capitalized net mortgage servicing rights totaled $329,602 and $48,065
at June 30, 1999 and 1998, respectively.
In the normal course of business, the Bank extends loans to directors
and executive officers of the Company and their affiliates. All of
these loans were made on substantially the same terms as loans to
other individuals and businesses of comparable creditworthiness. The
aggregate balance of loans greater than $60,000 was $99,000 and
$569,000 at June 30, 1999 and 1998, respectively.
(4) Office Properties and Equipment
-------------------------------
Following is a summary of office properties and equipment by major
classifications as of June 30, 1999 and 1998:
1999 1998
---- ----
Land $ 1,617,581 1,617,581
Buildings 8,513,962 8,486,417
Furniture and equipment 2,663,168 2,662,966
Computer equipment and software 3,621,618 3,535,201
Automobiles 132,578 113,679
Leasehold improvements 402,322 401,822
--------------------------
16,951,229 16,817,684
Less accumulated depreciation and amortization 9,732,589 8,897,024
--------------------------
$ 7,218,640 7,920,660
==========================
(5) Deposits
--------
Following is an analysis of interest-bearing deposits, which consist
of various savings and certificate accounts with varying interest
rates, as of June 30, 1999 and 1998:
1999 1998
Account type ---------------------- ----------------------
and stated interest rate Amount % Amount %
------------------------ ------ --- ------ ---
NOW accounts, up to 2.23% $ 36,677,860 8.02 $ 34,381,993 7.74
Money market accounts, up
to 4.41% 39,448,435 8.63 28,058,912 6.32
Passbook accounts, 2.25 % to 2.50% 92,719,043 20.27 93,276,617 21.01
------------------------------------------------
168,845,338 36.92 155,717,522 35.07
Certificate accounts:
3.00% to 3.99% 22,172,077 4.85 - -
4.00% to 4.99% 44,800,820 9.79 29,483,863 6.64
5.00% to 5.99% 144,645,834 31.63 141,125,055 31.78
6.00% to 6.99% 69,208,919 15.13 109,895,025 24.75
7.00% to 7.99% 7,669,814 1.68 7,795,957 1.76
------------------------------------------------
288,497,464 63.08 288,299,900 64.93
------------------------------------------------
$457,342,802 100.00 $440,017,422 100.00
================================================
At June 30, 1999 and 1998, scheduled maturities of certificate
accounts are as follows:
1999 1998
---------------------- ----------------------
Amount % Amount %
------ --- ------ ---
Less than 12 months $189,811,007 65.79 $163,691,247 56.78
13 to 24 months 55,191,248 19.13 67,829,342 23.53
25 to 36 months 23,196,762 8.04 19,414,656 6.73
37 to 48 months 12,246,369 4.25 18,091,111 6.27
49 to 60 months 6,517,036 2.26 15,967,370 5.54
Over 60 months 1,535,042 0.53 3,306,174 1.15
------------------------------------------------
$288,497,464 100.00 $288,299,900 100.00
================================================
The 1999 amounts above include callable certificate accounts totaling
$8,556,305 with a weighted average rate of 6.91%. Due to a decline in
current market rates, management has decided to exercise their call
options, which will extend through September 29, 1999.
Following is a summary of certificate accounts of $100,000 or more by
remaining maturities at June 30, 1999 and 1998:
1999 1998
---- ----
Three months or less $10,414,553 6,597,782
Over three to six months 8,007,383 11,476,932
Over six to twelve months 11,495,888 10,700,606
Over twelve months 17,840,509 19,775,033
-------------------------
$47,758,333 48,550,353
=========================
At June 30, 1999 and 1998, certificate accounts included $1,543,897
and $1,524,648, respectively, in customer deposits for which federal
agency obligations and/or mortgage-backed securities were pledged as
collateral in an amount equal to the certificate account balances. The
weighted average rate of the certificate accounts was 5.51% and 5.45%,
respectively, at June 30, 1999 and 1998. The certificates at June 30,
1999 for which securities are pledged are scheduled to mature from
January 2000 to April 2002.
Interest expense on deposits for the years ended June 30, 1999, 1998
and 1997 is summarized below:
1999 1998 1997
---- ---- ----
NOW accounts $ 476,884 636,915 620,759
Money market accounts 1,136,095 762,231 734,075
Passbook accounts 2,090,725 2,683,094 3,302,590
Certificate accounts 16,412,701 17,199,768 17,041,629
-----------------------------------------
$20,116,405 21,282,008 21,699,053
=========================================
The weighted average interest rate on deposits was 4.27% and 4.63% at
June 30, 1999 and 1998, respectively.
(6) Securities Sold Under Agreements to Repurchase
----------------------------------------------
At June 30, 1999 and 1998, securities sold under agreements to
repurchase were as follows:
1999 1998
---- ----
Short-term:
Repurchase agreements $ 6,617,747 13,088,323
Federal agency obligations pledged as collateral:
Book value, including accrued interest 10,236,120 15,376,953
Market value, including accrued interest 10,237,604 15,490,196
Average balance outstanding during the year 9,054,035 15,240,783
Maximum amount outstanding at any month-end 13,448,884 22,656,754
Weighted average interest rate 5.02% 5.76%
Long-term:
Repurchase agreements $51,300,000 51,300,000
Mortgage-backed securities pledged as collateral:
Book value, including accrued interest 61,469,494 56,146,814
Market value, including accrued interest 59,782,455 55,984,488
Average balance outstanding during the year 51,300,000 34,241,398
Maximum amount outstanding at any month-end 51,300,000 51,300,000
Weighted average interest rate 5.76% 5.76%
Short- and long-term repurchase agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a
liability in the consolidated statements of financial condition. The
pledged securities, although held in safekeeping outside the Bank,
remain in the asset accounts. A summary of individual long-term
repurchase agreements at June 30, 1999 and 1998 with respect to
maturity and call dates is summarized in the table below. The call
dates renew every three months and are at the option of the buyer.
Maturity Earliest call 1999 1998
-------- ------------- ---- ----
2/19/02 2/19/00 $25,000,000 25,000,000
1/16/03 1/16/01 10,000,000 10,000,000
3/19/01 9/19/99 16,300,000 16,300,000
(7) Borrowed Funds
--------------
Borrowed funds at June 30, 1999 and 1998 consist of advances from the
Federal Home Loan Bank (FHLB).
1999 1998
----------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
Advances from the FHLB of Cincinnati
with maturities less than one year:
Line of credit advances $ - - $ 2,985,000 6.02%
Repo-based advances 22,800,000 4.92% 31,000,000 5.56%
-----------------------------------------------
$22,800,000 4.92% $33,985,000 5.60%
===============================================
1999
-----------------------
Weighted
Maturity Average
Date Amount Rate
-------- ------ --------
Advances from the FHLB of Cincinnati
with maturities greater than one year:
LIBOR-based advance 8/26/00 $25,000,000 4.89%
Convertible fixed-rate advance 12/3/03 10,000,000 4.40%
Convertible fixed-rate advance 5/14/09 25,000,000 5.61%
---------------------
$60,000,000 5.11%
=====================
The FHLB line of credit advances have either fixed or adjustable
rates. Repo-based advances have 30-day fixed-rate terms and require
interest payments at maturity. The LIBOR-based advance is tied to the
3-month LIBOR plus 16 basis points and is adjusted quarterly. The
$10 million convertible fixed-rate advance can be converted, at the
option of the FHLB of Cincinnati, to a 3-month LIBOR-based advance on
December 3, 1999. The $25 million fixed-rate advance can be converted,
at the option of the FHLB of Cincinnati, to a 3-month LIBOR-based
advance on May 14, 2004. There were no long-term advances outstanding
at June 30, 1998. All advances from the FHLB of Cincinnati are secured
by a blanket mortgage collateral agreement for 150% of outstanding
advances, amounting to $124.2 million.
(8) Compliance with Regulatory Capital Requirements
-----------------------------------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
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 June 30, 1999, the minimum regulatory capital
regulations require institutions to have equity 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.
The most recent notification from the OTS categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions
or events since that notification that management believes have
changed the institution's category.
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 June 30, 1999
and 1998:
Tier-1 Tier-1 Total
Equity Core Risk-Based Risk-Based
June 30, 1999 Capital Capital Capital Capital
------------- ------- ------- ---------- ----------
GAAP capital $ 51,063,276 51,063,276 51,063,276 51,063,276
Accumulated losses on certain securities
available for sale, net 3,140,221 3,140,221 3,140,221
General loan valuation allowances - - 2,380,434
Other (329,602) (329,602) (565,575)
Regulatory capital 53,873,895 53,873,895 56,018,356
-----------------------------------------
Total assets 661,204,894
------------
Adjusted total assets 665,870,977
-----------
Risk-weighted assets 404,152,959 404,152,959
--------------------------
Actual capital ratio 7.72% 8.09% 13.33% 13.86%
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%
Tier-1 Tier-1 Total
Equity Core Risk-Based Risk-Based
June 30, 1998 Capital Capital Capital Capital
------------- ------- ------- ---------- ----------
GAAP capital $ 53,382,413 53,382,413 53,382,413 53,382,413
Accumulated gains on certain securities
available for sale, net (37,549) (37,549) (37,549)
General loan valuation allowances - - 2,037,651
Other (48,565) (48,565) (517,443)
-----------------------------------------
Regulatory capital 53,296,299 53,296,299 54,865,072
-----------------------------------------
Total assets 629,186,295
------------
Adjusted total assets 629,278,873
-----------
Risk-weighted assets 383,853,411 383,853,411
--------------------------
Actual capital ratio 8.48% 8.47% 13.88% 14.29%
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%
(9) Pension Plan
------------
The Bank had a defined benefit pension plan that covered substantially
all of its employees. On November 15, 1996, the Board of Directors
approved the termination of the pension plan due to significantly high
retirement cost. Upon termination, all participants in the plan became
fully vested. During 1998, the plan assets were distributed to the
participants in the pension plan.
Components of net pension cost for the years ended June 30, 1998 and
1997 were as follows:
1998 1997
---- ----
Service cost - benefits earned during
the period $ - 52,471
Interest cost on projected benefit obligation 50,820 114,296
Expected return on plan assets 8,589 (86,732)
Net amortization and deferral (832) (42,229)
Effects of settlement and curtailment (192,125) 85,016
---------------------
Net periodic pension cost (credit) $(133,548) 122,822
=====================
Assumptions used in the accounting for the pension plan were as
follows:
1998 1997
---- ----
Weighted average discount rate:
Preretirement N/A 6.00%
Postretirement N/A 5.56%
Expected long-term rate of return on assets N/A 7.00%
(10) SAIF Special Assessment
-----------------------
On June 30, 1997, the President signed into law an omnibus
appropriations act for fiscal year 1997 that included, among other
things, the recapitalization of the Savings Association Insurance Fund
(SAIF) in a section entitled the Deposit Insurance Funds Act of 1996.
The Act included a provision where all insured depository institutions
would be charged a one-time special assessment on their SAIF
assessable deposits as of March 31, 1995. The Bank recorded a pretax
charge of $3,010,964, which represented 65.7 basis points of the March
31, 1995 assessable deposits. This charge was recorded upon enactment
on September 30, 1996, and later paid on November 27, 1996.
(11) Income Taxes
------------
Federal income tax expenses include current and deferred amounts as
follows:
1999 1998 1997
---- ---- ----
Current $2,447,000 3,886,000 1,724,000
Deferred 1,593,000 261,000 696,000
------------------------------------
Federal income tax expense 4,040,000 4,147,000 2,420,000
Deferred federal tax expense (benefit)
on unrealized gains (losses) on
securities available for sale (1,871,000) 362,000 505,000
------------------------------------
$2,169,000 4,509,000 2,925,000
====================================
Actual federal income tax expense differed from the amounts computed
by applying the federal income tax rate of 35% to income before
federal income taxes as a result of the following:
1999 1998 1997
-------------------- -------------------- --------------------
Expected income
tax expense at
statutory rate $4,263,037 35.00% $4,156,674 35.00% $2,710,380 35.00%
Other (223,037) (1.83) (9,674) (0.08) (290,380) (3.75)
-------------------------------------------------------------------
Actual federal tax
expense $4,040,000 33.17% $4,147,000 34.92% $2,420,000 31.25%
===================================================================
The net tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at June 30, 1999 and 1998, is as follows:
1999 1998
---- ----
Deferred tax assets:
Deferred loan fees $ 842,000 768,000
Employee benefits 128,000 113,000
Bad debts reserves 899,000 932,000
Interest on nonaccrual loans 40,000 49,000
Other 54,000 57,000
-----------------------
Total gross deferred tax assets 1,963,000 1,919,000
-----------------------
Deferred tax liabilities:
FHLB stock dividends 950,000 838,000
Basis difference in fixed assets 172,000 213,000
Excess of tax reserves over base year amounts 961,000 1,153,000
Unrealized appreciation on securities
available for sale 166,000 419,000
Other 185,000 45,000
-----------------------
Total gross deferred tax liabilities 2,434,000 2,668,000
-----------------------
Net deferred tax liability $ 471,000 749,000
=======================
A valuation allowance is established to reduce the deferred tax asset
if it is more likely than not that the related tax benefits will not
be realized. In management's opinion, it is more likely than not that
the tax benefits will be realized; consequently, no valuation
allowance has been established as of June 30, 1999 and 1998.
Retained earnings at June 30, 1999 includes approximately $17,254,000
for which no provision for federal income tax has been made. These
amounts represent allocations of income to bad debt deductions for tax
purposes only. These qualifying and nonqualifying base year reserves
and supplemental reserves will be recaptured into income in the event
of certain distributions and redemptions. Such recapture would create
income for tax purposes only, which would be subject to the then
current corporate income tax rate.
Recapture would not occur upon the reorganization, merger, or
acquisition of the Bank, nor if the Bank is merged or liquidated tax-
free into a bank or undergoes a charter change. If the Bank fails to
qualify as a bank or merges into a nonbank entity, these reserves will
be recaptured into income.
The favorable reserve method previously afforded to thrifts was
repealed for tax years beginning after December 31, 1995. Large
thrifts must switch to the specific charge-off method of Section 166.
In general, a thrift is required to recapture its qualifying and
nonqualifying reserves in excess of its qualifying and nonqualifying
base year reserves. As the Bank has previously provided deferred taxes
on the recapture amount, no additional financial statement tax expense
should result from this legislation.
(12) Commitments, Contingencies, and Credit Risk
-------------------------------------------
In the normal course of business, the Bank is party to financial
instruments with off-balance sheet risk to meet the financing needs of
its customers and to minimize exposure to fluctuations in interest
rates. These financial instruments primarily include commitments to
extend credit and unused lines of credit. Currently the Bank does not
enter into forward contracts for future delivery of residential
mortgage loans. These instruments involve elements of credit risk and
interest rate risk in excess of the amount recognized in the con-
solidated statements of financial condition. The Bank's exposure to
credit loss in the event of nonperformance by the other party to the
commitment is represented by the contractual amount of the commitment.
The Bank uses the same credit policies in making commitments as it
does for on-balance sheet instruments. Interest rate risk on
commitments to extend credit results from the possibility that
interest rates may have moved unfavorably from the position of the
Bank since the time the commitment was made.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates of 30 to
180 days or other termination clauses and may require payment of a
fee. Since some of the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. Following is a table of financial instruments whose
contract amounts represent credit risk:
Amount Interest rates
------ --------------
June 30, 1999:
Fixed rate mortgage loans $11,650,570 6.75 - 10.00%
Variable rate mortgage loans 2,517,155 6.63 - 9.00%
Fixed rate commercial loans 3,200,000 8.00 - 8.25%
Variable rate commercial loans 192,857 9.00%
Fixed rate consumer loans 1,740,389 6.05 - 15.00%
Commercial lines of credit 2,700,000 8.25 - 8.75%
Undisbursed lines and letters of credit 8,195,471 8.13 - 18.00%
-----------
$30,196,442
===========
June 30, 1998:
Fixed rate mortgage loans $12,099,824 6.88 - 10.00%
Variable rate mortgage loans 2,434,541 6.63 - 8.50%
Fixed rate consumer loans 2,058,147 6.50 - 15.00%
Variable rate consumer loans 60,000 9.50%
Undisbursed lines of credit 4,083,442 9.50 - 18.00%
-----------
$20,735,954
===========
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained by the Bank upon extension of
credit is based on management's credit evaluation of the applicant.
Collateral held is generally single-family residential real estate.
The Bank's primary lending area is in Mahoning, Trumbull and
Columbiana counties in the state of Ohio. Accordingly, the ultimate
collectibility of a substantial portion of the loan portfolio is
susceptible to changes in market conditions in that area.
In the ordinary course of business, the Company has various
outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements. In
addition, the Company is a defendant in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material
adverse effect on the consolidated financial statements of the
Company.
(13) Director and Employee Plans
---------------------------
(a) Stock Option and Incentive Plan
-------------------------------
FFY sponsors a stock option and incentive plan for the benefit
of directors and employees of the Company. The number of shares
of common stock authorized under the plan is 1,326,000, equal to
10% of the total number of shares issued in the conversion
adjusted for the 100% stock dividend in 1999. Directors and
employees of the Bank vest in options issued over a two and one-
half year period beginning with the date of grant. The option
exercise price must be at least 100% of the fair value of the
common stock on the date of the grant, and the option term
cannot exceed 10 years. Outstanding options can be exercised
over a 10-year period from the date of the grant.
Following is activity under the plan during the years ended
June 30, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Options outstanding, beginning of year 463,704 531,090 629,904
Exercised at $5.00 per share (108,298) (67,386) (118,704)
Granted 39,780 - 19,890
--------------------------------
Options outstanding, end of year 395,186 463,704 531,090
================================
Exercisable:
At $5.00 per share 334,216 439,814 507,200
From $11.59 to $13.81 per share 34,450 23,890 7,962
Options available for grant, end of year 218,768 258,548 258,548
================================
The Company applies Accounting Principles Board (APB) No. 25 for
its stock option and incentive plan. Accordingly, no
compensation cost has been recognized. Had compensation cost for
this plan been determined consistent with SFAS No. 123, the
Company's net income and earnings per share pro forma amounts
for the years ended June 30, 1999, 1998 and 1997 would be as
follows (in thousands, except per share amounts):
1999 1998 1997
----------------- ----------------- -----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Net income $8,140 8,108 7,729 7,715 5,324 5,309
Basic earnings per share $ 1.15 1.15 1.03 1.03 0.62 0.61
Diluted earnings per share $ 1.11 1.11 0.99 0.99 0.60 0.59
==========================================================
The above results may not be representative of the effects of
SFAS No. 123 on net income for future years.
The Company applied the Black-Scholes option pricing model to
determine the fair value of each option granted. Below is a
summary of the assumptions used in the calculation:
June 30,
1999 1998 1997
---- -------- ----
Dividend yield 2.59 - 2.92% 2.59 - 2.92% 2.59 - 2.92%
Expected volatility 13.34% 13.34% 13.34%
Risk-free interest rate 4.62 - 6.49% 5.55 - 6.54% 5.55 - 6.54%
Expected option life 5.26 - 6.67 years 7.14 - 7.21 years 7.14 - 7.21 years
(b) Employee Stock Ownership and 401(k) Plan
----------------------------------------
In June 1993, the Company established the FFY Financial Corp.
Employee Stock Ownership Plan (ESOP) for the benefit of its
employees. The ESOP covers substantially all employees with more
than one year of employment and who have attained the age of 21.
The ESOP borrowed $5,304,000 from FFY and purchased 1,060,800
shares (adjusted for the 100% stock dividend) in conjunction
with the Bank's conversion. Effective January 1, 1997, the
Company amended the ESOP to include 401(k) provisions under
Section 401(k) of the Internal Revenue Code, thus forming the
FFY Financial Corp. Employee Stock Ownership and 401(k) Plan
(KSOP). The eligibility requirements of the KSOP did not change
pursuant to the amendment. Under the 401(k) provisions of the
KSOP, employees may elect to make pretax contributions of up to
15% of compensation as defined in the plan document. The Company
matches up to 6% of employee compensation in the form of stock
from the shares that are committed to be released to
participants for that year. The remaining shares after the
401(k) match are released to participants' accounts using the
shares allocated method. Dividends on allocated and unallocated
shares are used for debt service.
The Company follows SOP 93-6, Employers' Accounting for Employee
Stock Ownership Plans which requires that (1) compensation cost
be recognized based on the fair value of the KSOP shares when
committed to be released; (2) dividends on unallocated shares
used for debt service do not reduce compensation expense and are
not considered dividends for financial reporting purposes; and
(3) KSOP shares that have not been committed to be released are
not considered outstanding for purposes of computing earnings
per share.
KSOP compensation expense for the years ended June 30, 1999,
1998 and 1997 totaled $1,138,068, $1,131,374 and $976,059,
respectively. The fair value of unearned KSOP shares at June 30,
1999 and 1998 totaled $10,053,014 and $9,862,320, respectively.
Following is a summary of KSOP shares at June 30, 1999 and 1998:
1999 1998
---- ----
Allocated 531,694 453,888
Unallocated 529,106 606,912
----------------------
1,060,800 1,060,800
======================
(c) Recognition and Retention Plans (RRPs)
--------------------------------------
The Company and the Bank have a Recognition and Retention Plan
(RRP), formed in conjunction with the Bank's conversion in 1993.
Pursuant to the RRP, 477,360 shares of common stock were awarded
to directors and certain officers and were earned over a 31/2 year
period through December 1996, except for 3,318 shares that were
forfeited due to the retirement of a director in October 1996.
The aggregate purchase price of these shares, initially recorded
as a reduction of stockholders' equity, were amortized into
compensation expense as RRP participants became fully vested. At
June 30, 1999, there were 56,358 unawarded and unvested shares
in the RRP and are reflected as a reduction of stockholders'
equity. RRP expense for the years ended June 30, 1999, 1998
and 1997 was $-0-, $-0-, and $331,500, respectively.
(14) Stockholders' Equity
--------------------
On January 19, 1999, the Company announced a 100% stock dividend,
which is equivalent to a two-for-one stock split, that was paid on
March 5, 1999 to stockholders of record on February 19, 1999. The
Company used its then 2.8 million treasury shares and issued an
additional 959,366 shares to pay for the stock dividend. Proper
accounting treatment to record these transactions warranted the
decline in additional paid-in-capital and retained earnings, but did
not affect total stockholders' equity. Additionally, all share and per
share data have been restated as a result of the stock dividend.
In accordance with federal regulations, at the time the Bank converted
from a federal mutual savings bank to a federal stock savings bank,
the Bank restricted a portion of retained earnings by establishing a
liquidation account. The liquidation account is maintained for the
benefit of eligible account holders who continue to maintain their
accounts at the Bank. The liquidation account is reduced annually to
the extent that eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder is entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held. Under current regulations, the Bank is not permitted to pay
dividends on its stock if the effect would reduce its regulatory
capital below the liquidation account.
New OTS regulations allow well run, healthy thrift institutions that
satisfy certain criteria to make cash dividends without having to
notify their federal regulator. Previously, all thrifts had to give
OTS notice or apply to the agency to make a distribution. The new
rule updates and streamlines OTS' capital distribution rule and makes
it more consistent with those of other federal regulators. During the
years ended June 30, 1999, 1998 and 1997, the Bank paid cash dividends
to the Holding Company as shown:
Date Amount
---- ------
May 16, 1997 $4,500,000
October 16, 1997 1,630,583
January 23, 1998 1,577,312
April 13, 1998 1,713,029
July 15, 1998 1,609,984
July 20, 1998 3,400,000
October 15, 1998 1,563,763
January 15, 1999 1,735,963
April 12, 1999 1,872,575
May 20, 1999 750,000
At June 30, 1999, dividends payable from the Bank to the Holding
Company totaled $1,818,329.
After the dividends, the Bank's regulatory capital exceeds all of the
fully phased-in capital requirements imposed by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 as well as
the aforementioned liquidation account.
Unlike the Bank, the Holding Company is not subject to these
regulatory restrictions on the payment of dividends to its
stockholders. However, the source of future dividends may depend upon
dividends from the Bank.
(15) Fair Value of Financial Instruments
-----------------------------------
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, Disclosures About Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.
June 30, 1999 June 30, 1998
--------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Assets:
Cash and cash equivalents $ 11,472,806 11,472,806 10,075,182 10,075,182
Securities available for sale 190,325,599 190,325,599 140,793,201 140,793,201
Loans receivable 453,839,111 460,997,000 482,463,396 490,430,000
Loans available for sale 441,500 441,500 - -
Federal Home Loan Bank stock 4,841,200 4,841,200 4,511,500 4,511,500
Accrued interest receivable 4,661,786 4,661,786 4,119,691 4,119,691
Liabilities:
Deposits:
Certificate accounts 288,497,464 290,809,000 288,299,900 290,971,000
Other deposit accounts 168,845,338 168,845,338 155,717,522 155,717,522
Securities sold under
agreements to repurchase:
Short-term 6,617,747 6,617,747 13,088,323 13,088,323
Long-term 51,300,000 51,213,000 51,300,000 51,884,000
Borrowed funds:
Short-term 22,800,000 22,800,000 33,985,000 33,985,000
Long-term 60,000,000 59,944,000 - -
Accrued interest payable 2,251,666 2,251,666 1,064,546 1,064,546
The fair value estimates are based on the following methods and
assumptions:
* Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate their fair value.
* Securities available for sale. Fair values for securities are
based on quoted market prices or dealer quotes; where such
quotes are not available, fair values are based on quoted market
prices of comparable instruments.
* Loans receivable. The fair values of loans receivable are
estimated using a discounted cash flow calculation that applies
estimated discount rates reflecting the credit and interest rate
risk inherent in the loans to homogeneous categories of loans
with similar financial characteristics. Loans are segregated by
types, such as residential mortgage, commercial and consumer.
Each loan category is further segmented into fixed and
adjustable rate interest terms.
* Loans available for sale. The fair values of loans available
for sale are based on quoted market prices of similar loans
sold. At June 30, 1999, the carrying amount of loans available
for sale approximates its fair value.
* Federal Home Loan Bank stock. This item is valued at cost, which
represents redemption value and approximates fair value.
* Accrued interest receivable. The carrying amount of accrued
interest receivable approximates its fair value.
* Deposits. The fair values of fixed maturity certificate accounts
are estimated using a discounted cash flow calculation that
applies interest rates currently offered for deposits of similar
remaining maturities. The fair values of other deposit accounts
(passbook, NOW and money market accounts) equal their carrying
values.
* Short-term securities sold under agreements to repurchase. The
carrying amount of short-term securities sold under agreements
to repurchase approximates its fair value.
* Long-term securities sold under agreements to repurchase. Fair
value is estimated using a discounted cash flow calculation that
applies interest rates currently available to the Bank for debt
with similar terms and maturity.
* Short-term borrowed funds. Short-term borrowed funds reprice
frequently; therefore, the carrying amount approximates its fair
value.
* Long-term borrowed funds. Fair value is estimated using a
discounted cash flow calculation that applies interest rates
currently available to the Bank for debt with similar terms and
maturity.
* Accrued interest payable. The carrying amount of accrued
interest payable approximates its fair value.
* Off-balance sheet instruments. The fair value of commitments is
estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. For fixed-
rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed
rates. The fair value of undisbursed lines of credit is based
on fees currently charged for similar agreements or on estimated
cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date. The carrying amount
and fair value of off-balance sheet instruments is not
significant as of June 30, 1999 and 1998.
The fair value estimates are presented for on-balance sheet financial
instruments without attempting to estimate the value of the Bank's
long-term relationships with depositors and the benefit that results
from low-cost funding provided by deposit liabilities. In addition,
significant assets which are not considered financial instruments and
are, therefore, not a part of the fair value estimates include office
properties and equipment.
(16) Condensed Parent-Company-Only Financial Statements
--------------------------------------------------
The following condensed statements of financial condition as of
June 30, 1999 and 1998, and related condensed statements of income and
cash flows for the years ended June 30, 1999, 1998 and 1997 for FFY
Financial Corp. should be read in conjunction with the consolidated
financial statements and the notes thereto.
Condensed Statements of Financial Condition 1999 1998
------------------------------------------- ---- ----
Assets:
Cash $ 142,257 106,443
Short-term investments 865,000 895,000
---------------------------
Total cash and cash equivalents 1,007,257 1,001,443
Securities available for sale 11,060,613 21,827,325
Loans receivable 1,900,000 -
Note receivable - KSOP 3,094,000 3,447,600
Equity in net assets of the Bank 51,063,276 53,382,413
Interest receivable on investments 98,905 236,393
Dividend receivable from Bank 1,818,329 5,009,984
Other assets 563,496 607,155
---------------------------
Total assets $70,605,876 85,512,313
===========================
Liabilities and stockholders' equity:
Other liabilities $ 489,351 1,296,612
Stockholders' equity 70,116,525 84,215,701
---------------------------
Total liabilities and stockholders' equity $70,605,876 85,512,313
===========================
Condensed Statements of Income 1999 1998 1997
------------------------------ ---- ---- ----
Income:
Equity in earnings of the Bank and subsidiary $ 6,840,653 6,389,428 4,091,892
Interest income 1,302,593 1,587,602 2,143,876
Gain (loss) on sale of securities 331,433 266,002 (98,314)
--------------------------------------------
Total income 8,474,679 8,243,032 6,137,454
Expenses:
State and local taxes 50,720 116,271 167,882
Other 199,854 181,550 177,629
--------------------------------------------
Total expenses 250,574 297,821 345,511
--------------------------------------------
Income before income taxes 8,224,105 7,945,211 5,791,943
Income taxes 84,000 216,000 468,000
--------------------------------------------
Net income $ 8,140,105 7,729,211 5,323,943
============================================
Condensed Statements of Cash Flows 1999 1998 1997
---------------------------------- ---- ---- ----
Cash flows from operating activities:
Net income $ 8,140,105 7,729,211 5,323,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of the Bank and subsidiary (6,840,653) (6,389,428) (4,091,892)
Amortization and accretion 48,389 77,419 70,246
(Increase) decrease in interest receivable 71,435 (85,268) 449,649
Other, net (235,261) (191,303) 780
--------------------------------------------
Net cash provided by operating activities 1,184,015 1,140,631 1,752,726
--------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturity of securities available for sale - - 10,000,000
Sales of securities available for sale 17,388,127 13,648,851 28,254,806
Purchase of securities available for sale (7,690,267) (14,101,273) (23,875,482)
Principal receipts on securities available for sale - 595,851 441,346
Net increase in loans receivable (1,900,000) - -
KSOP loan repayment 353,600 353,600 353,600
Dividend from the Bank 10,932,286 4,920,924 4,500,000
Loan to subsidiary (33,500) (686,500) -
Other - (500) -
--------------------------------------------
Net cash provided by investing activities 19,050,246 4,730,953 19,674,270
--------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (17,675,478) (5,239,911) (25,982,802)
Dividends paid (3,102,129) (2,900,750) (2,889,944)
Proceeds from stock options exercised 559,294 336,930 555,270
Other (10,134) (19,866) -
--------------------------------------------
Net cash used in financing activities (20,228,447) (7,823,597) (28,317,476)
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,814 (1,952,013) (6,890,480)
Cash and cash equivalents at beginning of year 1,001,443 2,953,456 9,843,936
--------------------------------------------
Cash and cash equivalents at end of year $ 1,007,257 1,001,443 2,953,456
============================================
Supplemental schedule of noncash investing activities:
Dividend receivable from Bank $ 1,818,329 5,009,984 -
============================================
Independent Auditors' Report
The Board of Directors
FFY Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of FFY Financial Corp. and subsidiaries as of June 30, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FFY
Financial Corp. and subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in
the three-year period ended June 30, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Cleveland, Ohio
August 4, 1999
Officers and Directors
- ----------------------
Board of Directors of Board of Directors of Officers of First Officers of First
FFY Financial Corp. and FFY Holdings, Inc. Federal Savings Bank Federal Savings Bank
First Federal Savings Bank Of Youngstown of Youngstown, continued
Bank of Youngstown
A. Gary Bitonte, MD Jeffrey L. Francis Jeffrey L. Francis Janet Byrne
Medical Consultant President and CEO President and CEO Assistant Secretary
Private Investments of FFY Financial Corp. and
First Federal Savings Bank Therese Ann Liutkus, CPA Christine Chasko
Marie Izzo Cartwright of Youngstown Treasurer and CFO Assistant Controller
Vice President
Glimcher Properties Mark Makoski J. Craig Carr Richard Curry
Limited Partnership Vice President of First Federal Vice President, General Assistant Secretary
Savings Bank of Youngstown Counsel and Secretary
Janice S. Elias
Jeffrey L. Francis Henry P. Nemenz David S. Hinkle Assistant Treasurer
President and CEO President Vice President
of FFY Financial Corp. and H.P. Nemenz Food Stores, Inc. Dominic Mancini
First Federal Savings Bank Mark Makoski Assistant Secretary
of Youngstown W. Terry Patrick Vice President
Partner, Friedman & Rummell Jill Mayfield
Henry P. Nemenz Attorneys at Law Joseph R. Sainato Assistant Treasurer
President Vice President
H.P. Nemenz Food Stores, Inc. Myron S. Roh Frank Pasquale
Chairman of the Board of Timm B. Schreiber Assistant Secretary
W. Terry Patrick FFY Financial Corp. and Vice President
Partner, Friedman & Rummell First Federal Savings Bank Thomas J. Roberts
Attorneys at Law of Youngstown and Randy Shaffer Assistant Secretary
President and Treasurer Vice President
Myron S. Roh Scholl Choffin Co. Cheryl J. Taraszewski
Chairman of the Board of Jeffrey L. DeRose, CPA Assistant Treasurer
FFY Financial Corp. and Robert L. Wagmiller Controller
First Federal Savings Bank Partner/Principal of Jeanne G. Yankle
of Youngstown and Hill, Barth & King, Inc. Robert Adema Assistant Treasurer
President and Treasurer Assistant Vice President
Scholl Choffin Co. Jerome D. Zetts
Robert Campolito Assistant Treasurer
William A. Russell Officers of Assistant Vice President
President FFY Financial Corp.
Canteen Service of Steel Jane Hutchins
Valley, Inc. Jeffrey L. Francis Assistant Vice President Officers of
President and CEO FFY Holdings, Inc.
Randy Shaffer Jon Schmied
Vice President of Therese Ann Liutkus, CPA Assistant Vice President Jeffrey L. Francis
FFY Financial Corp. and Treasurer and CFO President
First Federal Savings Bank Dennis Sell
of Youngstown Randy Shaffer Assistant Vice President Therese Ann Liutkus, CPA
Vice President Treasurer
Ronald P. Volpe, Ph.D. Joanne Harrold
Professor of Finance J. Craig Carr Internal Auditor J. Craig Carr
Williamson College of Vice President, Vice President and
Business Administration General Counsel and Marilyn Burrows Secretary
Youngstown State University Secretary Assistant Treasurer
Randy Shaffer
Robert L. Wagmiller Vice President
Partner/Principal of
Hill, Barth & King, Inc.
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K filed with the Securities and
Exchange Commission will be available September 28, 1999 without charge upon
written request to:
Therese Ann Liutkus, CPA
Treasurer and CFO
FFY Financial Corp.
724 Boardman-Poland Road
P.O. Box 3300
Youngstown, Ohio 44513
Phone: (330) 726-3396
Fax: (330) 758-1356
E-mail: ffyinfo@ffybank.com
Web page: www.ffybank.com
Annual Meeting
The Annual Meeting of Stockholders of FFY Financial Corp. will be held at
10:00 a.m. on Wednesday, October 20, 1999 at:
The Holiday Inn
7410 South Avenue
Youngstown, Ohio 44512
Stockholder Services
Fifth Third Bank serves as transfer agent for FFY Financial Corp.'s shares.
Communications regarding change of address, transfer of shares, lost
certificates or dividend reinvestment should be sent to:
Fifth Third Bank
Corporate Trust Operations
38 Fountain Square Plaza
Mail Drop 1090F5
Cincinnati, Ohio 45263
(800) 837-2755
Market Makers
McDonald & Company Securities, Inc.
Herzog, Heine, Geduld, Inc.
Sandler O'Neill & Partners
Keefe, Bruyette & Woods, Inc.
Friedman, Billings, Ramsey & Co.
Stifel Nicholaus & Co.
Spear, Leeds & Kellogg
Parker/Hunter Inc.
Affiliations
Coldwell Banker FFY Real Estate, Ltd.
1275 Boardman-Poland Road
Youngstown, Ohio 44514
Phone: (330) 757-0777
Fax: (330) 726-1931
E-mail: dmeikle104@aol.com
Daniel W. Landers Insurance Agency, Ltd.
700 Boardman-Poland Road
Youngstown, Ohio 44512
Phone: (330) 726-4636
Fax: (330) 726-4635
E-mail: daniel.landers@mciworld.com.net
First Federal Savings Bank of Youngstown Office Locations
- ---------------------------------------------------------
Phone Number (330) 726-3396 connects all offices except Howland (330)
856-5566
Main Office 724 Boardman-Poland Road
P.O. Box 3300
Youngstown, Ohio 44513-3300
Branch Offices Downtown Canfield
25 Market Street, Suite 3 2 South Broad Street
Youngstown, Ohio 44503 Canfield, Ohio 44406
Westside Canfield Drive-up
4390 Mahoning Avenue 352 W. Main Street
Youngstown, Ohio 44515 Canfield, Ohio 44406
Southside Cornersburg
3900 Market Street 3516 S. Meridian Road
Youngstown, Ohio 44512 Youngstown, Ohio 44511
Northside New Middletown
600 Gypsy Lane 10416 Main Street
Youngstown, Ohio 44505 New Middletown, Ohio 44442
Logan Way Howland Loan Office
4423 Logan Way 5000 E. Market Street, Suite 16
Youngstown, Ohio 44505 Warren, Ohio 44484
Poland FFY Professional Building
30 South Main Street 1275 Boardman-Poland Road
Poland, Ohio 44514 Youngstown, Ohio 44514
Personal Photos:
Page 8-Y2k Committee (left to right)
Janice Elias, Michele Barnett, Rick Thomas, Jeff DeRose, Jill Mayfield,
Dominic Mancini, Lynn Kegley, Bob Campolito, Debbie Seinkner, Tom Scott,
Judy Pabst.
Page 15- Real Estate Lending Group (left to right)
Dominic Mancini, Dennis Sell, Randy Shaffer, Robert Adema, Timm B. Schreiber